Available Investment Options
When it comes to investment options, there are many types of investments to choose from that can be made using different investing styles.
Some of the investment options available include mutual funds, stocks, ETFs, and closed-end mutual funds as well as shares that can see you own part of a company. Let’s look at these in more detail.
Investing in stocks sees a buyer venture into an opportunity that allows them to play an active part in the success of a company through buying shares that subsequently help increase the company’s stock prices and dividends it declares. The purchase of the shares makes the buyer a shareholder of the company that giving them a claim in the business’ assets during liquidation though the buyer does not own the assets.
Shareholders that are holders of common stock have a voice (voting rights) that can shape the direction the company takes. They also are entitled to receive dividends when the business declares them. Those that are holders of preferred stock may not have the same voice but enjoy a high preference for dividend payments over the common stockholders, and they also have a higher claim on the company’s assets.
When dealing in bonds, you are investing in debt instruments whereby you are loaning money to a business or organization (the issuer) expecting periodic interest payments in return along with the full amount of the bond’s value upon is maturity. In most cases, bonds are issued by the federal government, governmental agencies, state depart, and municipalities as well as some corporations.
A bond will have a face value (e.g., a corporate bond can be $1,000) with interest paid semi-annually. Interestingly, interest on municipal bonds is tax exempted while that on corporate bonds are taxable. The municipal bonds can also be exempted from state taxes for those residing in the issuing state. As for treasury bonds, their interests are only taxed at the federal level.
You can invest in bonds as new offerings or find them on the secondary market as you would when you invest in stocks. The value of a bond can go up or down depending on various prevailing factors, with the direction of the interest rates as per market influence being the most significant factor. The prices of bonds are often inverse to the direction the interest rates are headed.
3. Mutual funds
Mutual funds are regarded as simpler investment game because the investment is often made by someone else. With this option, the investor will put money into a pooled investment that’s under the stewardship of an investment manager who put the money into stocks, or bonds, or any other investment option as stated in the brochure. Buying or selling of shares are done after the market closes and the valuation of the mutual funds is done at the end of the day’s trading.
With this type of investment, the investor can passively track the stocks and bonds indexes on the market such as the Barclay’s Aggregate Bond Index, the S&P 500, and others. Conversely, some mutual funds are actively managed by having bonds, stocks and other investments under the fund actively selected by an investment manager. However, such mutual funds are a pricey investment plan. The underlying expenses of a fund should aim at reducing the net investment returns to the holder of the mutual fund.
Mutual fund shareholders can enjoy dividends, capital gains, and interest, and all these are taxable when held in a non-retirement account. And just as with an individual stock or bond, the sale of a mutual fund can yield a profit or loss.
The beauty of mutual funds is that a small investor can have an instantly diversified exposure when buying several investment holdings that are within the fund’s portfolio. For instance, a mutual fund of foreign stock and have more than 50 different types of foreign stocks, and an investor can own all these holdings with an initial investment amount of a little as $1,000.
Exchange-Trade Funds (ETFs) mirror mutual funds to some degree but are traded on the market during the day’s trading window just like the shares of stock. However, ETFs are not valued in the same way as mutual funds at the end of the day’s trading. Their valuation is recurrent during the period when the markets are open.
But like with mutual funds, ETFs also passively track market indexes such as the Russell 2000 index of small-cap stocks, S&P 500, Barclay’s Aggregate Bond Index and others. Over the last couple of years, actively managed ETFs have evolved to be known as “smart beta ETFs” since they create indexes based on dynamics such as momentum, quality, and low volatility.
5. Alternative investments
Investment options stretch beyond those of stocks, bonds, mutual funds, and ETFs. Real estate investments are a perfect example and can entail transactions such as the direct purchase of a residential or commercial property. Investors can do this through REITs (Real Estate Investment Trusts) where their money is pooled for the procurement of real property. REITs are trades the same as stocks and some ETFs and mutual funds invest in REITs.
Other investment options that fall under this category include private equity and hedge funds. However, qualification for investing in these options are restrictive where only those that have an income and net worth that meets set requirements are accredited the opportunity to invest in them. The elitism of hedge funds can be attributed to the fact that they hold up better than the conventional investment options during turbulent times in the market. As for private equity, companies can offer such with the aim of raising capital without having to go public.
Some private real estate funds can also fall under the category of alternative investments. Liquid alternatives are yet another option, and these are more of ETF and mutual fund formats that allow the investor a lower minimum investment with great liquidity. It is prudent to point out that most of these alternatives tend to be restrictive when it comes to how frequent an investor can access money.