Equity Instruments
These represent a share of ownership,
such as stocks and real
estate. Unlike debt instruments,
they carry no fixed yield. When
the issuing company makes
money, its shareholders may
be paid dividends. Share prices
range from pennies to thousands
of dollars and may give the
owner voting rights or an
option to buy more shares
at discounted prices.
Although there are many factors,
stock prices generally reflect the
movement of the economy. They
tend to rise when the economy
is expanding because expansion
indicates higher corporate
revenues and profits. During a
recession, stock prices may drop
since corporate sales are slower
and unemployment rises.
The following investment instruments
offer higher potential
rewards, but at higher risk levels,
particularly market risk. Capital
gains — the profits that result
when an investment is sold for
more than its cost — and dividends
are generally subject to
federal and often state and local income tax.
- Stock is issued by corporations
to raise capital. Purchasing
stock essentially buys you
ownership in the corporation.
Stocks hold the potential for
high returns, accompanied
by a corresponding amount
of risk.
Stocks are often
chosen to keep your returns
in step with inflation. Buying
and selling individual
stocks can be done through a
registered broker, and brokers
charge a commission, or sales
fee, on each transaction. Keep in mind that these commissions
reduce returns you earn. If
you feel confident to make
your own purchase decisions,
low commission or discount
brokers can execute your
buy and sell instructions at
a much lower cost than traditional
full-service brokers.
However, if you do use a
traditional stockbroker, make
sure the broker has a securities
license and is employed
as a registered representative
of a brokerage or mutual fund
company.
- Real estate is also used as a
hedge against inflation because
when inflation rises,
real estate values usually rise
with it. Because real estate
moves in cycles like other
investments, real estate properties
should be evaluated
as long-term investments.
While you own real estate,
you are liable for property
taxes. Federal, and maybe
state, income tax deductions
may be available for those
payments, as well as for interest
charges and maintenance
expenses.
Mutual Funds
A mutual fund pools the money
of many investors, and then
invests in a variety of stocks,
bonds or other securities.
To accommodate a wide range
of these objectives in one portfolio, investment companies
have developed "families"
of funds. A typical family may
include an aggressive growth
fund, a growth fund, an income
fund, a balanced fund, a money
market fund, an index fund and a
tax-exempt fund.
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Advantages Of Mutual Funds
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| While fund returns are not
guaranteed, mutual funds offer
many advantages, especially for
the inexperienced investor. |
| Diversification |
Mutual funds allow you to
invest in a variety
of industries and categories of stocks, bonds
and money market investments, which may be
difficult to do individually without having large
amounts of money to invest. |
| Liquidity |
Mutual funds are highly liquid;
you can redeem or sell your shares at any time at their current value. |
| Flexibility |
Families of funds let you
switch investments as goals change. |
| Convenience |
Most funds allow you to invest
automatically with an allotment or automatic withdrawal from
your bank account. In addition, you can buy
or sell fund shares by phone, by mail and
increasingly online. |
| Professional Management |
Mutual funds are managed by professionals; individual
investors usually cannot get the same level
of investment advice without a large portfolio. |
| Regulation |
The industry is regulated by the
Securities and Exchange Commission. |
| Low Cost |
Some fund families such as "no-load" fund families, allow
you to invest without paying a commission or transaction fee. |
Selecting A Mutual Fund
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Factors To Consider
|
| Fund Objectives |
Objectives can range from income to growth to balanced funds
and each brings its own measure of risk — or volatility. |
| Fund Performance |
When assessing an individual fund, compare its performance
— the historic rate of return — over periods of 3, 5 and 10 years. |
| Fund Reputation |
Research the mutual fund company: How long has it been in
business? How is it ranked among other fund companies? |
| Fund Costs |
Load mutual funds carry a sales charge that is paid to the
investment firm that sells the fund. No-load funds do not carry
a sales charge and are normally sold directly from the investment
company that manages the fund. Every mutual fund, regardless of whether it has a load or not,
will have operating expenses. You can find fund costs in a fund’s prospectus.
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Basic Money Management
Basic Money Management
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