It's a Money Thing®
Investment Vehicles
Investing can seem like a very risky, complex and fast-moving process. With endless combinations of investment vehicles to choose from, it can be difficult to take your first step as an investor—especially with the knowledge that all investments carry the risk of losing some or all of your money. So why bother?
Well, there are many compelling reasons to make investing a part of your overall financial plan. Investing can help preserve your wealth by overcoming the effects of inflation, help you save for long-term goals (such as retirement or your children’s education) and it can even generate income. So how can you get past all the negatives associated with investing and make it work for you? A helpful first step is to realize that, as a young investor, you have time on your side.
Let's review the most common investment vehicles that are available to you: Stocks, Bonds, and Mutual Funds.
Stocks:
Stocks are shares of the ownership of a company. When you purchase a share, it's like you own a slice of that company. When you have equity in that company, you are entitled to a portion of its profits as well. Another way to benefit from owning stock
in a company is by trading them for a higher value than what you purchased them for.
Stocks can also be a risky form of investment, because their values are always changing. Stock values can be impacted by supply and demand, company outlook, and even what's happening in our world.
Now, imagine all that data changing and updating daily; suddenly, it’s clear why it can—and should—take so much time to make educated investment decisions.
Bonds:
Companies and governments will issue bonds as a way to raise funds. When you purchase bonds, you are essentially lending the company or government money. In exchange, the bond issuer pays interest on the borrowed amount. The interest rate on a bond is called the coupon rate. Bonds also have maturity dates, which is when the bond issuer is expected to repay the total amount.
Like stocks, bonds can be traded. Overall, bonds are considered a more stable investment vehicle. However, that comes at a price. Bonds offer a lower potential gain than stocks, and there is still the risk that the issuer may not pay you back.
Mutual Funds:
A mutual fund is a collection of stocks and/or bonds. Your money is pooled with the money of other investors into a fund that is invested in anywhere from a few dozen to hundreds of different securities.
The fund is managed by an expert fund manager who reports to a board of directors. This provides you with professional money management as well as a diversified portfolio of funds. A diversified portfolio means that you are invested in a variety of stocks and bonds that come from different industries, which helps to spread out your risk.
Mutual funds are a relatively inexpensive way for a new investor to gain access to a wide variety of investments. However, just because your money is being managed by a professional doesn't mean that it is guaranteed.
It's important to remember that investing can be risky regardless of the vehicle you use. Investments made in stocks, bonds, and mutual funds carry the risk of losing money, even when they are made through a financial adviser or financial institution. You will want to learn as much as you can before investing your hard-earned cash.
Time is an important factor too. It can give you more control over your investments, it can increase your tolerance for risk and your ability to recover from any losses, and it can maximize your returns. By starting early, investing wisely and giving yourself the time you need to reach your goals, you will discover the positive impact that a little bit of planning today will have on your lifestyle in the future.