Common Investment Choices Explained
If you’re a new investor, you have probably heard about the three most common ways to make your money grow: stocks, bonds and mutual funds. With all of these instruments, investors have one main goal: to make their investments grow. But the way they work will be different, as are the risks involved. If you’re a new investor, you should seek to get complete information about any type of investment you are thinking of buying. This will allow you to better decide whether this specific type of investment is right for you.
Stocks are certainly one of the best ways to make wealth grow and this has been seen over and over throughout modern history. New investors are often attracted to stocks as they’re seen as an investment that has a high profit potential. While it’s true that some of the richest people in the world got to where they are today by making wise stock purchases, achieving spectacular growth is very difficult.
When you purchase a stock, you are essentially buying partial ownership of a company. There are two ways that you can make money from stocks. Dividends are paid out in cash by some companies and represent your part of the profit that the company you own stock in made. The other, most common way is an increase in the share price. If you buy a stock, the value will fluctuate every trading day according to the principle of supply and demand. The more people buy shares in a company, the more the price of existing shares will go up. But there are risks, because the reverse is also true. If more people sell their stocks than there are buyers, the price per share can quickly tumble. If a company goes bankrupt, its stocks could become worthless, causing you to lose your entire investment.
Investing in Bonds
Bonds are seen as a safer way to make money and are issued by corporations, as well as governments. When you purchase a bond, you are basically lending money to the institution that issued it, in return for a fixed return. Bonds are seen as a safer investment, although they are not guaranteed to be completely safe. If a company that has issued the bond goes bankrupt, investors could end up losing all of their money. For this reason, bonds issued by the Federal Government (US Savings Bonds) are safer, followed by municipal bonds.
Mutual Fund Investments
Mutual funds are basically a pool of money that investors contribute to. A fund manager is responsible for investing the money put in the fund and making it grow. Usually, stocks are purchased with the money held in the pool.
Different funds will have different investment strategies. For example, some funds will make investments only in blue chip companies, while others invest in new start ups or in a specific sector of the industry. To help guide your choice, you can always take a look at how the fund did in the past, but this is not a guarantee of future performance. The value of your investment in a mutual fund can go down if the underlying investments perform poorly.
Written by Pete Southern on behalf of stockpricetoday.com where you can find real time stock prices for free along with investor tools.