5 types of investments for beginners
Investing is a way to make a fortune by buying assets that you think should rise in value over time. There are many areas of investment, for example, buying any material objects (real estate, land, art objects) for the purpose of resale. But now we are going to talk about a more volatile matter – the securities markets.
The stock market is an abstract space where investors buy and sell stocks. By investing in shares, you buy a share, a more or less significant part of a company. More shares in your hands – more your stake, and if the company does well, you will make a profit. You can get income in one of two ways:
firstly, if your shares rise in price, you can sell them much more expensive than you bought;
secondly, many companies, mainly large ones, pay dividends to their shareholders. Part of their income is distributed among the shareholders in proportion to their share.
But if the company bears a loss, the shareholders are also in the red. And the value of the stock falls. So by investing in stocks, you are taking quite a lot of risk.
Since the stock market is quite volatile, it is best to invest for a long time. One of the most common mistakes a novice investor makes is buying / selling decisions based on news reports. With short-term investments, investors are often too rushed to sell stocks that have fallen in price. But after a while, prices rise again, and much higher than the level before the sale, bringing profit to the more far-sighted trader who managed to redeem them.
Bonds are essentially debentures of corporations or governments. When you buy a bond, you are lending an amount equal to its value to the entity that issued the bond. Investing in bonds provides a reliable return, since they are supposed to pay fixed payments to the owner at certain intervals, usually twice a year. Therefore, bonds are called “fixed income assets”.
Issuing bonds entails a legal obligation to pay the debt back to those who own them. Therefore, investing in bonds is considered more reliable than investing in stocks. However, this type of securities does not promise an exponential increase in income, and shares can give such a capital increase. But they can also bring big losses.
The least risky investment may be the purchase of federal treasury bonds. Regional and municipal bonds are slightly less reliable. Investing in government bonds also provides tax incentives.
Investing in bonds of private companies is much more risky. The most reliable of them are called “investment grade bonds”, and the most unsafe for an investor – “junk”. The risk in buying the latter is partly offset by high interest rates.
Mutual investment fund
A mutual investment fund (MIF) is a complex of stocks, bonds and other types of securities. Such a fund buys securities of various companies and then offers investors shares – fund shares. As a rule, mutual funds are created and managed by professionals in the field of finance, and the composition of the investment package is determined by the manager. But some of these complexes – index funds – are tied to market indices and follow their dynamics, rather than being manually managed. Index funds are, for example, S&P 500, Dow Jones Industrial Average. We’ll discuss index funds in more detail in the section on Exchange Traded Funds (ETFs).
Buying a mutual fund means becoming the owner of assets related to different market sectors, without the dreary work of tracking active shares and buying them. Unlike the shares themselves, such complex packages are not traded on the stock market. To buy or sell a share in a mutual fund, you will have to contact the investment company that issued it. This can only be done at the close of trading.
To gain access to many mutual funds, it is necessary to make a large contribution when purchasing the first share – to overcome the entry threshold. Such a condition can prove to be a serious obstacle for a novice investor.
Exchange Traded Funds
Exchange traded funds (ETFs) are similar to mutual funds. The difference is that they are usually not controlled by a living person. Instead, ETFs are passively linked to indices.
Many ETFs closely follow the structure of the stock market as a whole or of the package included in the main index. Some cover specific market segments. For example, there are ETFs, which include securities of companies belonging to the same industry or operating in the same region. The same ETF can also include companies with similar values of the total value of their assets on the market (market capitalization).
Because index funds are index-linked, they tend to pay lower dividends than mutual funds. Unlike mutual funds, index funds are traded in the same way as stocks on stock exchanges during exchanges.