There are many ways to invest and reach personal financial goals, all of which require a monetary plan, proper research, and professional guidance. Some popular investment products are stocks, bonds, real estate, mutual funds, and Exchange Traded Funds (ETFs). Learn how these five popular investment products work and how they can play a role in your investment portfolio in these brief descriptions.
When investing in stocks an investor buys shares in a certain company, making themselves shareholders. Buying, reinvesting, and holding stocks are great ways to accumulate wealth. Over longer periods of time, stocks typically outperform other investment options.
It is best to buy and hold stocks because of their volatility. Stock performance depends on a variety of aspects from politics and world events, to a company’s well being (if a company goes out of business the stock is worthless).
Investing in a bond is essentially lending money to a company or government that promises, but does not guarantee, that they will pay back your principal with interest. You receive a steady and predictable income and low interest rates. Some bonds have lower risks of default and pay interest that is free from federal tax.
Unlike stocks, bonds do not offer the possibility of high long-term returns, and if sold before principal is repaid, the investor can lose money. Bondholders do not share in the growth of the company; however, if the company goes bankrupt, bonds will lose value and possibly become worthless.
When investing in real estate, investors typically buy property with the intentions of generating profit through real estate appreciation, cash flow, and real estate related income.
A disadvantage to real estate is the lack of liquidity; real estate is more complicated to sell. To sell real estate one must:
- Put the property on the market (undetermined amount of time)
- Wait for the right buyer (undetermined amount of time)
- Negotiate price
- Sign the property over.
Affordability, diversification, liquidity, and convenience are often motivating factors for those considering an investment in mutual funds. A mutual fund is a company that pools investor’s money to invest in stocks, bonds, money-market instruments, etc. Mutual funds, also referred to as open-ended funds, make income investments based on a stated investment objective. For example, some mutual funds are designed to produce growth through stocks or real estate; while others are constructed to produce income by investing in bonds or other income-producing investments.
Disadvantages of mutual funds include, but are not limited to, investor’s expenses (i.e. sales charges and annual fees), and lack of control (managers make all the decisions, limiting an investor’s ability to manage their portfolio). Although the government regulates mutual funds, there is no insurance against losses.
Exchange Traded Funds (ETFs)
Convenience, flexibility, and tax efficiency are often attractive characteristics when considering an investment in ETFs. ETFs are a combination of stocks and mutual funds; they represent a collection of stocks and trade intraday. They buy and sell quickly in tandem with market movements.
ETFs cannot reinvest dividends back into a portfolio and dividends are paid to owners at the end of each quarter, also known as dividend drag.
Stocks & Bonds
|Bought and sold individually or through mutual funds||Bought directly or through limited partnerships||Pool money from many investors to create a portfolio||Pool money from investors to buy securities|
These popular investments may not currently be a part of your portfolio, but each have distinct advantages and disadvantages. To benefit from any investment product you must use them strategically and with the guidance of a financial advisor.