Investment Products: Mutual Funds, Managed Funds, Stocks, and Bonds
Whether you’re a new investor or have experience, most of the investment products you own fall into a few basic categories: stocks and bonds, or the mutual or managed funds that combine different kinds of assets. Below is everything you need to know about these products so you can be a more informed investor:
Stocks are one of the most basic kinds of security — in other words, a financial asset you can trade. Owning a share of stock is like owning a small piece of a company. When the company’s value goes up, so does the value of your stock. Selling stock to investors is a way for companies to raise funds to grow and develop the business even further.
How do you buy stocks for your portfolio? Stocks are sold on regulated exchanges to ensure investors aren’t defrauded. Stock exchanges like NASDAQ or NYSE let traders or brokers buy and sell securities for investors. Today, most people trade stocks using one of the major online brokers.
If stocks are investments into a company in exchange for a stake, bonds are more like simple loans. Companies and governments often sell bonds as a way to raise funds for a major project. They pay investors a fixed interest rate for an agreed-upon term. The investor doesn’t have to hold onto the bond until its maturity date — they can sell to another investor whenever they like.
Most bonds are sold on the open market, but their value can fluctuate based on the state of the rest of the economy. Because they have fixed interest rates, they become more desirable (and valuable) when interest rates as a whole are low, since they may have locked in a rate higher than the going rate. By contrast, when other interest rates rise, the bond’s rate doesn’t look so appealing anymore, and its value falls.
Generally, investors see bonds as a lower-risk product than stocks. Bonds promise a certain return at a certain date, while stocks track the volatile value of an individual company. You may not be able to make a fortune off bonds alone, but you’ll usually get a steadier return. That’s why you’ll see many portfolios include a higher proportion of bonds as the investor nears retirement and needs a less risky income stream.
Unlike stocks or bonds, a mutual fund isn’t a tradable security. Instead, it’s more like a group project. The fund is called “mutual” because a manager takes money from thousands of investors and uses that buying power to purchase many different kinds of assets. When you buy into a mutual fund, you access a diversified portfolio with investments you couldn’t get if you were the average investor. Mutual funds are also transparent and regulated, so you know exactly what the manager does with your money.
If you want a product that combines aspects of mutual funds and stock trading, look at exchange-traded funds (ETFs). They often track a commodity or index, letting you buy a diversified pool of securities or an asset type. With a mutual fund, you can only buy once a day after the market closes, ETFs are bought and sold on an exchange all day. Mutual funds often have a minimum investment, and with EFTs, you can buy by the share. Compared to other investment products, ETFs may also offer lower fees or commissions.
Mutual funds are a great way for middle-income investors to grow their money. Managed funds tend to be preferred by higher-net-worth investors. Instead of pooling your money with other investors, you get custom portfolio management for you alone. You work with a firm or manager to decide exactly which assets to buy and adjust your strategy as you go. In a managed fund, the investor gets more say over philosophy and strategy because the manager works directly for you.
Whatever your age, situation, or goals, it’s important to have an advisor you trust to help you invest your money. Our experts at Plimoth Investment Advisors work with you to design the right mix of investments that will build a better financial future for you and your loved ones. Contact us today to get started!