This month, we are looking at all things investing, understanding all the little nooks and crannies, so how better to start it than to write about the basics.
Here is an introduction to stocks, bonds, portfolios, diversification and mutual funds
Stocks
A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares.
With this, the Stock Market is a mechanism to buy and sell shares in companies (Stock).
Speculating and Trading in the stock market can be exciting and many make it seem like you can make money hand over fist. It has alot of risks
( If it were that easy we'll all quit our jobs and buy that island)
The market goes up and it also comes down. So know what you're doing, don’t get suckered by an up market that seems like it can’t end. It can and it will. But, at some point, it will also be ready for another climb.
Bonds
Bonds can be corporate or government and basically act as a means of financing debt. For instance if a city needs to build new roads, they might issue bonds that can be insured or uninsured. Companies also issue bonds to help finance their operation.
What you need to know about bonds is that interest rate and price have an inverse relationship. Meaning if rates go up in the world of financial markets, the price of the bond goes down.
Imagine you originally bought the bond at par (which is the price when issued), however interest rates have gone up a percent, your bond can only be sold for at less than what you bought it for.
Portfolios and Diversification
Portfolio is a group of your investments, think of your investment portfolio can be thought of as a pie that is divided into pieces of varying sizes, representing a variety of asset classes and/or types of investments to accomplish an appropriate risk-return portfolio allocation.
Diversification, well it means diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk.
The market does offer people an opportunity to make more than the trickling interest rates most banks offer. However its always safer and smarter to have a diversified portfolio. It's not a secret that smart investors diversify, so by putting your money in vehicles along the spectrum from risky to risk-free.
Note: The building blocks of a portfolio are usually stocks, bonds and cash. From there you can use any of the different types of securities can be used to build a diversified portfolio.
Mutual funds
A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds or other securities.
Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price. They are usually divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
They charge annual fees also known as expense ratios and, in some cases, commissions, which can affect their overall returns.
By pooling money from the investing public, mutual funds use that money to buy other securities, usually stocks and bonds. Their value strictly depend on the performance of the securities it decides to buy.
Basically speaking, when you buy a unit or share of a mutual fund, you are really buying the performance of its portfolio or more precisely, a part of the portfolio's value.
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