Do you want to get started investing but don't know where to start? One of the most important things you can do as a new investor is to understand the basic building blocks of traditional investing and what they mean for your portfolio. What are these basics? Here's a primer for what you need to know.
Stocks are the most common investing tool people think of when they think of "the market". And it's certainly not called "the stock market" for nothing. A stock is simply a share of ownership in a company. Companies can either issue stock in a private capacity to certain parties, or they can buy and sell their stock on the open market.
Individuals and organizations buy units of stock at certain prices, adding these to their portfolio of investments. The hope is that the value of this stock will increase and then each unit can be sold at a profit. In the meantime, many companies also share their profits with stockholders by paying dividends quarterly or annually.
Stocks are the most volatile investment most Americans generally encounter because anything can happen to the companies they invest in. The companies may increase in profits or they may not. They may suffer setbacks or even go out of business. Investing in stocks should be done with the aid of professionals and experienced investors who know the market.
Buying a bond is a loan you make to an agency or company — either to fund its operations in general or to fund a specific project. Bonds are less volatile than stocks because loans generally get paid back. They are particularly safe when purchased from a stable government organization. In return for this stability, though, you get a lower profit on that bond than you would from many stocks.
Bonds make excellent contrasts against stocks in a balanced portfolio. This way, you manage your risk along with your returns.
3. Mutual Funds
Mutual funds are mixtures of the above investment types that are put together by a company so that investors don't have to do all the work of balancing and continuous planning. You can even opt for mutual funds targeted toward retirees or those with a certain social or ethical focus, as well.
Mutual funds (and related Exchange Traded Funds) are ideal for new investors who may not have the skill or confidence to choose their own stocks and bonds. However, they may come with a lower rate of return than some of the individual component stocks.
What is the right investment for you? It depends on many factors, including your financial situation, your goals, your age, and your risk tolerance. The best way to learn more and find the perfect balance is to work with an experienced stockbroker. Make an appointment today to start your journey to financial independence.
For more information, contact a company like Peak Brokerage Services, LLC.