There are a vast number of investment opportunities available to
potential investors, but not all of them are right for all purposes. The
most common types of investments are stocks and bonds. Stocks are
shares of individual companies, while bonds are government-issued
investment funds. Both can be great for starting in the investing
market, but you should know a little about the difference between the
two before making your investment.
Stocks
Stocks can help balance out a bond-heavy portfolio by providing diversification
Stock dividends also receive more favorable tax treatment than bond payouts.
If you make the decision that stocks may be the place for you to
put your investment dollars, you must now determine the primary purpose
of your stock investment.
The two primary stock investment goals are income and growth. You
can have a combination of the two in one stock investment, but the
features are almost never equal. In other words, although growth and
income may co-exist in a particular stock investment, the investment
choice you make should take into account the primary strength of the
stock.
Growth Stock vs. Income Stock
Growth stock is stock in a company that doesn't pay cash
dividends, but instead reinvests its profits into the company. The idea
behind this strategy is that the company will continue to grow and
become more profitable, driving the stock price up.
Income stock is stock in well-established companies that do not
need to reinvest their profits into their companies and therefore use
their profits to pay dividends to stockholders. Income stock is often
more expensive because the income stream and security of the investment
is greater.
Mutual Funds
Many investors invest in the stock market through mutual funds.
Mutual funds are professionally managed and are easier to diversify your
investments in, which makes them less risky than investing in
individual stocks. You still have to research what type of stock will
best suit your goals, but the average investor finds it less stressful
to invest in the stock market through this method.
Bonds
Bonds, though some consider them "safer" than stocks, still come
with risks. Some bond funds offer enticing payouts but may take big
chances to do so, including venturing into lower-quality and
longer-duration credits; if your funds' bonds lose value, you could see
your principal shrink even though you're pocketing a healthy yield.
Checking a fund's quarterly losses can be an easy way to see whether you
could stomach a given fund's short-term losses. There's nothing wrong
with making room for some higher-yielding bond funds around the margins
of your portfolio, but consider these income-heavy funds to be side
items because of their greater potential for volatility.
And while paying for high-quality financial advice can be money
well spent, think carefully before paying a sales charge for a bond
fund. If you're paying a 3.75% load to buy a bond fund (and that's a
pretty low load), you're surrendering most of your first year's income
payments from the get-go.
Individual Bonds vs. Bond Funds
Many investors prefer to invest in individual bonds rather than
bond funds. While that's a reasonable tack if you're buying Treasury
securities or perhaps even extremely high-quality corporate bonds, it
makes sense to opt for a professionally managed bond fund for every
other type of fixed-income security. Not only will a mutual fund offer
you much more diversification (and therefore lower risk) than you could
obtain by buying individual bonds, but smaller investors who are buying
and selling individual bonds are also at a big disadvantage when it
comes to trading costs.
About the author
John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the www.directonlineloans.co.uk website.
