Introduction to Different Types of Investments
Investing can be a daunting subject! Don't worry, though - we are here to help you learn the basics of investing your money. Want to learn more about investing? This guide will help you find resources that cover different types of investments.
The building block of investing is a security. Everything starts from there. Securities are issued by a company or government agency, and prove ownership and a right to share in the earnings of the issuer.
When deciding how to invest your money, it is important to know the different types of investments that are available.
Stocks - Stocks are securities that represent a fraction of ownership in a public company (also known as equity). A share of a company's stock represents one fraction of that equity. Ownership of shares of a company gives you ownership of the business, in proportion to the total number of shares outstanding. The price of a share of company stock rises and falls in relation to the company's success and failure.
Bonds - A bond is a debt security - a loan of money to a public corporation or a government agency, on the part of the bond buyer. Bonds are issued with a maturity date, at which time the issuer repays the value of the loan. Bondholders receive periodic dividends as interest on the loan. Government bonds are usually guaranteed by the United States government if the bond defaults. Corporate bonds are usually not protected if the corporation defaults on the loan, and are a riskier investment because of this.
Mutual Funds - a mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase securities. Mutual funds are usually structured to invest the owners' money in stocks, bonds, or both. Fund owners generally pay a fee of their earnings to the company managing the fund. Mutual funds often invest in specific types of securities, such as the stock of companies in a financial index, or municipal bonds. These investments are the mutual fund's holdings, and all of the holdings are collectively referred to as its portfolio. By investing in a mutual fund, you are diversifying your investments and not placing all of your money on one company or bond, which could fail and wipe out all of your investment.
How to Invest
Investors can buy and sell securities in two ways. The first is to open a trading account through a brokerage. This can be done with an online brokerage, where you do all of the work of buying and selling securities. Alternately, you can hire a financial advisor, who may provide recommendations as to which securities you should buy and sell. You will likely spend more money with a financial advisor, in paying them a fee, but the trade-off is that you have their advice on making strong investment decisions.
The second is to place money in a retirement account, such as a 401k plan or individual retirement accounts (IRA). 401(k) plans are offered by employers, and the employer sometimes offers a "company match" of a certain amount of money for every dollar you invest in your plan. Company match programs are usually offered only by businesses; non-profit and government employers generally do not offer them, though they may offer a pension plan instead. These plans often (but not always) offer only mutual funds for investing. Generally, you will need to conduct your own research in deciding which funds will make up your portfolio, depending on which funds the plan offers. A good rule of thumb when investing your money in a 401k plan is to invest in mutual funds that require low administrative fees. Using an online database such as Morningstar Investment Research (free to access for every Brooklyn Public Library patron with a BPL card), you can search for low-fee mutual funds.
To open an IRA, you need to work with a financial advisor. Be advised that along with the fees you will pay to your advisor, your investment choices may be limited to funds maintained by the advisor's company, and those funds may include substantial fees as well. However, you do get the benefit of the investment advice of a licensed professional who can create an investment plan for you, and/or help you reach your retirement goals. You are paying the financial advisor for the work you may not be doing.
Stocks that are offered to the public must be registered with the Securities & Exchange Commission. Municipal bonds must be registered with the Municipal Securities Rulemaking Board. Be aware that an unregistered security may be a scam.
Public companies routinely file financial reports with the SEC. These reports are available to the public through its EDGAR (Electronic Data Gathering, Analysis & Retrieval) database. The more common, periodic filings for public companies include:
10-K (an annual report on the company's financial performance for the fiscal year)
10-Q (a quarterly report on the company's financial performance for the latest fiscal quarter)
8-K (a report for notable events, such as a company press release, or a merger or acquisition)
DEF14A (a proxy statement to shareholders for the fiscal year's shareholder meeting, which includes voting on significant matters)
How can you research these documents? Using your Brooklyn Public Library card, you can log onto the Morningstar Investment Research Center (accessible on our Library Databases tab above). Morningstar provides several years of EDGAR documents for most public companies (filings for those companies that are not covered by Morningstar are available on the SEC's website, sec.gov, as are all public filings dating back to the late 1990s).
For access to information and filings on municipal bonds, visit the Municpal Securities Rulemaking Board's EMMA (Electronic Municipal Market Access) website (listed on the Free Websites tab, above)
Five Questions to Ask Before You Invest
What should a first-time investor (or any investor, for that matter!) know before they make an investment? The SEC offers this easy-to-understand guide, with five questions you should ask yourself first.
Financial advisors and brokerage firms are licensed by the government. FINRA (the Financial Industry Regulatory Authority) offers a convenient online service, BrokerCheck, that provides investors with a broker's employment history, licensing information and regulatory actions, arbitrations and complaints.