New to Investing? Start Here.

              The first step is to identify what the different investment types are and how they operate to determine if one type is a better fit for you and your goals. An investment that often comes to mind is a “stock”. But what exactly is a stock? Simply put, owning a share of stock is having a fractional share of ownership in a company. When a person owns shares of stock in a company, that investor can participate in receiving proportionate profits (or losses) attributable to the shares they own, relative to the total number of shares outstanding. This can be a risky investment, as the stock price tends to be driven upwards if investors purchase additional shares. Investors tend to buy stock when they believe that the company will go up in value. If their assumptions are correct, the stock will increase in value and shares can then be sold for a profit. However, if their assumptions are incorrect, there is a chance that the company will decrease in value and shares would potentially be sold at a loss, as shareholders sell shares of stock.

              If the thought of potential gains is appealing and the risk of potential losses doesn’t bother you, but you’re feeling apprehensive about trusting a specific company, a mutual fund may be a better fit for your portfolio. While declining in popularity in recent years[1], mutual funds are a common investment that provides a way for investors to reduce their exposure to a specific company. A mutual fund is an investment that pools together an investors’ money with other investors’ money to “mutually” buy stocks, bonds, and other investments. Mutual funds are managed by professionals who decide which securities the mutual fund should purchase. Oftentimes, these funds will invest in specific industries (for example, healthcare), or will follow a specific index (such as the S&P 500).

              Within the mutual fund category, there are two different investment strategies that professional money managers will utilize: active and passive. An actively managed mutual fund has an underlying goal to outperform the index that the mutual fund is mirroring. For example, if a mutual fund is mirroring the S&P 500 index, an actively managed fund will try to outperform the S&P 500 index. As a result, an actively managed fund can have higher fees than a passively managed fund. A passively managed fund is a fund that simply tries to track the performance of the underlying index that it mirrors and oftentimes has lower fees associated with it. For example, an S&P 500 passive mutual fund will try to match the performance of the S&P 500 index. One important consideration when investing in a mutual fund is that mutual funds are only priced once per day- at the end of market close. As a result, any orders to buy or sell a fund will not be executed until the end of the day that the order is placed.

              Wait- mutual funds have fees? They do! There are a few different types of fees that can be associated with a mutual fund, so be sure to ask your advisor or read the fund prospectus for more information. Some of the different fees that an investor can incur are operating expense ratio, a load fee (or sales charge), and a transaction fee. An operating expense ratio is a fee that covers the costs associated with running the fund. A load fee, or a sales charge, is typically a one-time commission charge that some companies will charge to buy or sell their funds. A transaction fee is a fee that may be assessed by a brokerage firm to buy or sell a mutual fund.

               If you’re not sure if a mutual fund is right for you, an Exchange-Traded Fund may be more appropriate. Often referred to as an “ETF”, an exchange-traded fund is like a hybrid of a stock and a mutual fund. Like a mutual fund, an ETF is a pooled fund that has many underlying holdings and isn’t representative of one individual company’s stock. Similar to a passively managed mutual fund, ETFs will often track an industry (for example, healthcare or technology) or an index (such as the S&P 500 or the Russell 2000). However, unlike a mutual fund, ETFs are traded throughout the day and any buy/sell orders of an ETF are executed in real-time during the open stock market hours. In this way, an ETF behaves like a stock would. As with mutual funds, both actively managed and passively managed ETFs are available to investors. Actively managed ETFs will try to outperform the index that they mirror, and the passively managed ETFs will track the performance of the index that they mirror. It is important to note that ETFs usually have lower expense ratios than a mutual fund does, however, the passively managed ETFs will tend to be lower than an actively managed ETF. Be sure to ask your advisor or read the prospectus to get more information on the expense ratio or trading fees associated with the ETF you are considering.

              An investment that is typically viewed as “less risky” than a stock or an ETF is a bond. Bonds are issued by government or corporate entities at a stated interest rate. Bonds are issued whenever a government or corporate entity is looking to raise cash. By purchasing a bond, you are lending your money to the issuing entity, who will repay your money to you at a specific date, known as the maturity date. Interest is paid by the issuing entity (commonly, interest is paid semi-annually), at the stated interest rate of the bond. After purchasing a bond, investors can choose to either hold the bond, or trade it. Holding the bond simply means that the bond is not redeemed until the maturity date stated on the bond. Investors will receive any interest payments during that time.

              If an investor chooses to trade a bond, it is important to note that bonds are traded on a “secondary market”. A secondary market is a market in which investors buy and sell bonds directly to one another. Once a bond is initially issued, its price will fluctuate on the secondary market in the way that a stock would. An investor who chooses to hold their bond to maturity date will not need to worry about the fluctuations in value on the secondary market, as the interest rate and face value will not change.

              Within the bond universe, there are many different issuing entities: Federal government, state governments, local governments and municipalities, as well as corporations. Bonds can be further subdivided by “duration” meaning the time it takes for an investor to be repaid the bond’s price by the cash flows of the bond. This is expressed in years, and as a result, can be easily confused with the maturity of the bond- which is the length of the bond or the time it takes for the bond to mature; also expressed in years!

              There are some risks to be aware of when considering bonds as an investment choice. One risk to be aware of is “interest-rate risk”. Interest-rate risk is the risk an investor assumes because a bond purchase commits to receiving a fixed rate for a defined period. If the market rate rises during that time, the price will decrease. If the bond is sold before maturity, then the bond will be sold at a discount, as the buyer will make a lower return on the bond.

              Credit risk or default risk is the risk that the issuer of the bond will become insolvent and be unable to pay its obligations. If an issuer defaults, the investor may lose all or part of their investment, as well as any interest owed to them. Credit rating companies, such as Moody’s, Fitch, and Standard & Poor’s, provide credit ratings to bond issues to help investors determine the probability of an issuer defaulting on bond payments.

              There are many other types of investments, however, stocks, mutual funds, exchange-traded funds, and bonds are generally the most common. You should speak with a financial professional to ensure that you thoroughly understand the risks of any investment you are considering and whether they are appropriate for you. If you, or someone you know, is looking for more information on where to begin, or if you’d like a second opinion of your current investments, please contact Bickling Financial Services at 781-862-9792 and we would be happy to connect.

[1] Iacurci, G. (2023, November 6).  3 big reasons exchange-traded funds went ‘mainstream’ with investors. CNBC. https://www.cnbc.com/2023/11/06/3-big-reasons-exchange-traded-funds-went-mainstream-with-investors.html