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    Introduction to Investing: A Beginner’s Guide to Asset Classes

    Learning where different assets stand on the investment risk ladder is the first step to understanding investments.

    Overview STOCK MARKET BASICS

    Stock Market Definition

    Primary and Secondary Markets

    How to Buy/Sell Stocks

    Market Hours Stock Exchanges

    HOW STOCK INVESTING WORKS

    How to Start Investing in Stocks: A Beginner’s Guide

    What Owning a Stock Means

    The Basics of Order Types

    Position Sizing Executing Trades

    When to Sell a Stock

    Income, Value, Growth Stocks

    Commissions

    Best Investment Apps

    BROKERS Brokerage Accounts

    Best Online Brokerage Accounts and Trading Platforms

    Best Trading Platforms for Beginners

    Best Discount Brokers

    INVESTING VS. TRADING

    Investing and Trading Differences

    Stocks vs. ETFs

    Stocks vs. Mutual Funds

    ETFs vs. Mutual Funds

    BONDS & FIXED INCOME

    What Is a Bond?

    Bond Yield Definition

    Basic Bond Characteristics

    How to Buy a Bond Corporate Bonds Government Bonds Municipal Bonds Bond Risks OPTIONS & FUTURES Options vs. Futures

    Essential Options Trading

    MANAGING A PORTFOLIO

    Diversification

    Measuring Investment Returns

    Corporate Actions Dividends STOCK RESEARCH Stock Fundamentals

    Essentials of Analyzing Stocks

    Sectors

    Evaluating Company Financials

    Technical Analysis

    A Beginner’s Guide to Asset Classes

    By JAMES CHEN Updated January 04, 2022

    Reviewed by CHARLES POTTERS

    The investment landscape can be extremely dynamic and ever-evolving. But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul.

    The first step is learning to distinguish different types of investments and what rung each occupies on the risk ladder.

    KEY TAKEAWAYS

    Investing can be a daunting prospect for beginners, with an enormous variety of possible assets to add to a portfolio.

    The investment risk ladder identifies asset classes based on their relative riskiness, with cash being the most stable and alternative investments often being the most volatile.

    Sticking with index funds or exchange-traded funds (ETFs) that mirror the market is often the best path for a new investor.

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    How to Invest In Stocks: A Beginner's Guide

    Understanding the Investment Risk Ladder

    Here are the major asset classes, in ascending order of risk, on the investment risk ladder.

    Cash

    A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives investors precise knowledge of the interest that they’ll earn but also guarantees that they’ll get their capital back.

    On the downside, the interest earned from cash socked away in a savings account seldom beats inflation. Certificates of deposit (CDs) are less liquid instruments, but they typically provide higher interest rates than those in savings accounts. However, the money put into a CD is locked up for a period of time (months to years), and there are potentially early withdrawal penalties involved.1

    Bonds

    A bond is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital. Bonds are commonplace in organizations that use them to finance operations, purchases, or other projects.2

    Bond rates are essentially determined by interest rates. Due to this, they are heavily traded during periods of quantitative easing or when the Federal Reserve—or other central banks—raise interest rates.3

    Mutual Funds

    A mutual fund is a type of investment where more than one investor pools their money together to purchase securities. Mutual funds are not necessarily passive, as they are managed by portfolio managers who allocate and distribute the pooled investment into stocks, bonds, and other securities. Individuals may invest in mutual funds for as little as $1,000 per share, letting them diversify into as many as 100 different stocks contained within a given portfolio.

    Mutual funds are sometimes designed to mimic underlying indexes such as the S&P 500 or the Dow Jones Industrial Average. There are also many mutual funds that are actively managed, meaning that they are updated by portfolio managers who carefully track and adjust their allocations within the fund. However, these funds generally have greater costs—such as yearly management fees and front-end charges—that can cut into an investor’s returns.

    Mutual funds are valued at the end of the trading day, and all buy and sell transactions are likewise executed after the market closes.4

    Exchange-Traded Funds (ETFs)

    Exchange-traded funds (ETFs) have become quite popular since their introduction back in the mid-1990s. ETFs are similar to mutual funds, but they trade throughout the day, on a stock exchange. In this way, they mirror the buy-and-sell behavior of stocks. This also means that their value can change drastically during the course of a trading day.

    ETFs can track an underlying index such as the S&P 500 or any other basket of stocks with which the ETF issuer wants to underline a specific ETF. This can include anything from emerging markets to commodities, individual business sectors such as biotechnology or agriculture, and more. Due to the ease of trading and broad coverage, ETFs are extremely popular with investors.5

    Source : www.investopedia.com

    Mutual Funds

    What are mutual funds? A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

    Mutual Funds

    Mutual Funds What are mutual funds?

    A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

    Why do people buy mutual funds?

    What types of mutual funds are there?

    What are the benefits and risks of mutual funds?

    How to buy and sell mutual funds

    Understanding fees Avoiding fraud

    Additional information

    Why do people buy mutual funds?

    Mutual funds are a popular choice among investors because they generally offer the following features:

    Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

    What types of mutual funds are there?

    Most mutual funds fall into one of four main categories – money market funds, bond funds, stock funds, and target date funds. Each type has different features, risks, and rewards.

    Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U.S. corporations, and federal, state and local governments.Bond funds have higher risks than money market funds because they typically aim to produce higher returns. Because there are many different types of bonds, the risks and rewards of bond funds can vary dramatically.Stock funds invest in corporate stocks. Not all stock funds are the same. Some examples are:

    Growth funds focus on stocks that may not pay a regular dividend but have potential for above-average financial gains.

    Income funds invest in stocks that pay regular dividends.

    Index funds track a particular market index such as the Standard & Poor’s 500 Index.

    Sector funds specialize in a particular industry segment.

    Target date funds hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s strategy. Target date funds, sometimes known as lifecycle funds, are designed for individuals with particular retirement dates in mind.

    What are the benefits and risks of mutual funds?

    Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:

    Dividend Payments. A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses.Capital Gains Distributions. The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.Increased NAV. If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

    All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

    A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.

    How to buy and sell mutual funds

    Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.

    Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The fund usually must send you the payment within seven days.

    Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment objectives, risks, performance, and expenses. See How to Read a Mutual Fund Prospectus Part 1, Part 2, and Part 3 to learn more about key information in a prospectus.

    Understanding fees

    As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.

    Even small differences in fees can mean large differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return, and annual operating expenses of 1.5%, after 20 years you would have roughly $49,725. If you invested in a fund with the same performance and expenses of 0.5%, after 20 years you would end up with $60,858.

    Source : www.investor.gov

    10 Types of Investments and How They Work

    A guide to various types of investments, how they work and what role they can play in a portfolio. We look at stocks, bonds, mutual funds, ETFs and more.

    10 Common Types of Investments and How They Work

    Ben Geier, CEPF® MAY 03, 2022

    Investing can intimidate a lot of people because there are many options, and it can be hard to figure out which investments are right for your portfolio. This guide walks you through 10 of the most common types of investments, from stocks to crypto, and explains why you may want to consider including each in your portfolio. If you’re serious about investing, it might make sense to find a financial advisor to guide you and help you figure out which investments can help you to meet your financial goals.

    1. Stocks

    Stocks, also known as shares or equities, might be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership stake in a publicly-traded company. Many of the biggest companies in the country — think General Motors, Apple and Facebook — are publicly traded, meaning you can buy stock in them.

    How you can make money: When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.

    2. Bonds

    When you buy a bond, you’re essentially lending money to an entity. Generally, this is a business or a government entity. Companies issue corporate bonds, whereas local governments issue municipal bonds. The U.S. Treasury issues Treasury bonds, notes and bills, all of which are debt instruments that investors buy.

    How you can make money: While the money is being lent, the lender gets interest payments. After the bond matures — that is, you’ve held it for the contractually determined amount of time — you get your principal back.

    The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be a lower risk. There is still some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds, notes and bills, however, are considered very safe investments.

    3. Mutual Funds

    A mutual fund is a pool of many investors’ money that is invested broadly in a number of companies. Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks securities in which to put investors’ money. Fund managers often try to beat a designated market index by choosing investments that will outperform such an index. A passively managed fund, also known as an index fund, simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Mutual funds can invest in a broad array of securities: equities, bonds, commodities, currencies and derivatives.

    Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is often lesser, though, because the investments are inherently diversified.

    How you can make money: Investors make money off mutual funds when the value of stocks, bonds and other bundled securities that the fund invests in go up. You can buy them directly through the managing firm and discount brokerages. But note there is typically a minimum investment and you’ll pay an annual fee.

    4. Exchange-Traded Funds (ETFs)

    Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, which are purchased through a fund company, shares of ETFs are bought and sold on the stock markets. Their price fluctuates throughout the trading day, whereas mutual funds’ value is simply the net asset value of your investments, which is calculated at the end of each trading session.

    How you can make money: ETFs are often recommended to new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index. And just like mutual funds, you can make money from an ETF by selling it as it gains value.

    5. Certificates of Deposit (CDs)

    A certificate of deposit (CD) is a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time. When that time period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate.

    How you can make money: CDs are good long-term investments for saving money. There are no major risks because they are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are major penalties for early withdrawals.

    6. Retirement Plans

    There are a number of types of retirement plans. Workplace retirement plans, sponsored by your employer, include 401(k) plans and 403(b) plans. If you don’t have access to a retirement plan, you could get an individual retirement plan (IRA), of either the traditional or Roth variety.

    How you can make money: Retirement plans aren’t a separate category of investment, per se, but a vehicle to buy stocks, bonds, and funds in two tax-advantaged ways. The first, lets you invest pretax dollars (as with a traditional IRA). The second, allows you to withdraw money without paying taxes on that money. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.

    Source : smartasset.com

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