Are you curious about how to invest in stocks or mutual funds?
If so, keep reading. We have created this guide to stocks and mutual funds to help beginning investors understand the basics of stocks and mutual funds investing.
What Are Stocks?
Stocks, also sometimes referred to as equity, are ownership shares in public companies. When you buy shares of common stock, you are buying a small piece of ownership in a big business. By offering shares of stock to the public, large businesses like Apple, Google and IBM enable ordinary investors to potentially benefit from their growth in value over time and from dividends they may pay out on a regular basis.
Businesses offer shares of stock to the public in order to raise cash so they can continue to invest in growth. Investors buy stock to realize a return on investment and build wealth. This is accomplished in two primary ways:
1. Stock price appreciation:Ideally, the price of stock will go up over time, enabling investors to sell shares at a higher price later and earn a profit — or in other words, to buy low and sell high. However, there’s no guarantee that a stock’s price will rise in the future. If it falls, the investor will suffer a loss when selling. This tends to make stocks riskier than some other types of investments.
2. Dividend payments: These are payments that public companies make to shareholders out of profits earned. Dividends are usually paid on a quarterly basis. Not all public companies pay dividends — those that do are considered income-producing stocks because they pay out income on a regular basis.
What Are Mutual Funds?
When buying stocks, it’s generally a good idea to invest in the stocks of many different companies to spread out, or diversify, your risk. This way, if the stock of one or more companies falls in value, the stock of other companies you own may rise in value to offset potential losses.
Mutual funds make it easy for ordinary investors to build a diversified portfolio without having to purchase the shares of lots of different companies individually. With a mutual fund, the money from thousands of investors is pooled together to invest in the stock of many different businesses. Buying shares of a mutual fund provides instant diversification.
When you buy mutual fund shares you also benefit from professional money management. Experienced fund managers buy and sell stocks with the goal of generating a positive return on investment for shareholders. Mutual funds issue prospectuses to potential investors that explain their specific investment objectives and the types of companies they invest in. For example, funds may invest in growth or income-generating stocks, and they may concentrate on certain industries like financial services, technology, transportation or healthcare.
Mutual funds don’t invest only in stocks. They may also purchase bonds, money market instruments and other types of assets, including precious metals and even cryptocurrencies. Regardless of the type of assets, the concept is the same: A professional fund manager buys and sells securities with the goal of meeting the investment objectives set forth in the fund prospectus.
Investing in stocks and mutual fund investing are two of the most common strategies used by many individuals to build wealth. Think about whether these strategies could help you achieve your financial and investing goals.
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.