Publicly traded stocks are offered through exchanges. In the United States, the most popular exchanges are the New York Stock Exchange and the NASDAQ Exchange both of which offer stocks from hundreds of different companies.
Many investors choose individual stocks for capital gain. A capital gain occurs when you buy something for a lower price and sell it for a higher price. By carefully choosing which stocks to buy and when to sell, investors have had success in earning positive returns while investing in stocks.
The disadvantage of investing in stocks is the possibility that stocks may also drop in value resulting in a capital loss. A capital loss occurs when you buy something for one price and then sell it later for a lower price. If a company goes under, you could lose your investment entirely.
A second advantage of investing in some stocks is the possibility of earning dividends. Many investors choose to invest in dividend paying stocks as a means of producing additional income. Dividends represent the sharing of a corporation’s profits with its owners. If you buy stock in Coca Cola for example, and Coca Cola earns a profit, the corporation may choose to share a portion of that profit with the company’s owners, the stockholders.
Dividend payments are dependent on various factors such as market conditions and are not guaranteed. It also may be discontinued or modified at any time.
Mutual funds are a popular way to invest in securities. Because mutual funds can offer built-in diversification and professional management, they offer certain advantages over purchasing individual stocks and bonds. But, like investing in any security, investing in a mutual fund involves certain risks, including the possibility that you may lose money.
Technically known as an “open-end company,” a mutual fund is an investment company that pools money from many investors and invests it based on specific investment goals. The mutual fund raises money by selling its own shares to investors. The money is used to purchase a portfolio of stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. Each share represents an ownership slice of the fund and gives the investor a proportional right, based on the number of shares he or she owns, to income and capital gains that the fund generates from its investments.
The particular investments a fund makes are determined by its objectives and, in the case of an actively managed fund, by the investment style and skill of the fund’s professional manager or managers. The holdings of the mutual fund are known as its underlying investments, and the performance of those investments, minus fund fees, determine the fund’s investment return
While there are literally thousands of individual mutual funds, there are only a handful of major fund categories:
Stock funds invest in stocks
Bond funds invest in bonds
Balanced funds invest in a combination of stocks and bonds
Money market funds invest in very short-term investments
You can find all of the details about a mutual fund—including its investment strategy, risk profile, performance history, management, and fees—in a document called the prospectus. You should always read the prospectus before investing in a fund.
Mutual funds are sold by prospectus. Investors should read the prospectus carefully and consider the investment objectives, risks, charges, and expenses of each fund carefully before investing. The prospectus contains this and other information about the investment company. Please contact your representative or the investment company to obtain the prospectuses.
Bonds are a form of debt. When you purchase a bond, you are in essence loaning that entity money. Whether an investor purchases a corporate, federal or municipal bond, by purchasing the bond the investor is loaning that corporation or government entity money.
Bonds offer two primary advantages. The first is current income. Most bonds offer current income in the form of interest payments. By loaning a corporation or government entity money when purchasing a bond, investors are compensated in the form of interest.
The second advantage of bonds is that they may offer a guaranty of principle. The guaranty is provided by the entity that is issuing the bond so it is important to check the creditworthiness of the entity before making any bond purchase. At the end of the bond term, the bond issuer repays the owner of the bond the full amount that was borrowed when the bond was issued.
Disadvantages with bonds include include default, interest rate, market, and inflation risks. Adverse conditions may affect the issuer’s ability to pay interest and principal on bonds. A company or government entity may default on their debt and the investor could lose any or all of their investment. This is why creditworthiness is such an important factor when making a bond purchase.
Another disadvantage with bonds is that they can be subject to interest rate fluctuations. When interest rates rise, the value of current bonds tends to fall. When interest rates fall, the value of current bonds tends to rise. If a bond is held to maturity, the investor will still receive the value of the bond at maturity.
Real Estate Investment Trusts (REIT)
Real Estate Investment Trusts can offer opportunities for both capital gains and income.
A capital gain occurs when you buy something for a lower price and sell it for a higher price. Capital gains may be taxed at a different rate than the tax rate than income.
Real estate can also offer the potential for income through the rental of a property. By renting a property an owner can collect income to improve their standard of living. Rental income from a property may be offset by the special tax deductions available to investors in real estate.
Real estate also has several disadvantages as an investment. The first is that real estate is subject to market fluctuations. As became evident during the Great Recession in 2008, real estate investments can be subject to substantial losses. It is for this reason that most investors consider real estate a long term investment.
Another disadvantage of real estate as an investment is that it usually includes costs related to the upkeep and maintenance of the property, property taxes and insurance costs.
If you are relying on a property for rental income, the property may also be subject to vacancy risk. If a property goes vacant, the owner is still responsible for any mortgage payments, insurance, taxes and upkeep regardless of whether the property is rented or not. This can lead to substantial costs to the investor if a property remains vacant for an extended period of time.
Investments in Real Estate may not be appropriate for all
investors, may have limited transferability and lack liquidity. Real estate values may fluctuate based on economic and environmental factors. The suitability of such investment will be assessed for clients based on their objectives, risk tolerance, and time horizon..