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Learn the ABCs of Investing: Stocks, Bonds, and Mutual Funds

 

Each type of investment instrument comes with its share of risks and benefits. While some products offer you better rewards, others guarantee minimal returns but with minimized risks. So, selecting the best investment product is totally up to you. Every investor has varying risk tolerance levels, and it’s important that you consider the important factors associated with the investment before entering the stock market. The higher risk brings higher returns, while the investments associated with low risks bring low returns.

Additionally, how much time you have for research also matters here. For example, intraday trading does not need a lot of research on the company, its goals, financial position, and more. The stock investments, on the other hand, require you to consider the company’s long-term objectives before making any decision.

Mutual funds are completely different. It comes with reasonable risk, but it locks you in for a long period. The research is not needed, as the mutual funds manager will handle that part. So, what are the different types of investments and what level of risks do they carry. Most importantly, how do you know which investment is your best option and how much money should you invest as a beginner. That’s what we are here to find out. By the end of this post, you will know the basics of investments in stocks, bonds, and mutual funds. So, keep reading!

Stocks

Stock investment is the most reliable and stable form of income for the investor. When you invest in the shares of a company, you become a partial owner of the organization. And, as an owner, you will receive a dividend or a small portion of the profit generated by the company. The dividend is distributed to the shareholders on a monthly, quarterly, or annual basis. You will receive this dividend for as long as you keep the shares of the organization.

Another way to generate income from the shares is by selling them to a third party. You can sell shares to someone and keep the profits. This will be considered capital gain. The prices of stocks fluctuate almost every hour, so there is a good opportunity for the shareholders to sell the shares of a company to an investor at a price higher than the purchase price.

Mutual Funds Investment

In Mutual Funds, a group of investors pools together a considerable amount of money to purchase stocks from different companies. You will be assigned a fund manager who oversees all the trading activities of the mutual funds and keeps you up-to-date with all the latest trends in this industry. The fund invests your money in the stocks of reputable companies.

The best part about mutual funds investment is that you don’t have to do market research. The funds will compare different companies and research their objectives. Mutual Funds could also invest your money in bonds and other securities that bring a stable return.

Bonds

Bonds are mainly seen as the securities that balance your investment portfolio by offering risk diversification. As exciting and lucrative as the bond sounds, it leaves many investors confused. Investors do not really know how to invest in bonds and how exactly it works. The market is complex, there is no denying that.

In simple terms, it is the loan a company acquires from the investors. Rather than going to the bank to raise a loan, a company might decide to issue bonds to the investors and pay a coupon interest annually. This interest is paid to the investor as long as the company does not return the capital amount to the investor. The company has to return the capital once the bond reaches maturity. The contract ends there. It is one of the most steady sources of income for investors. The bonds can last for a year to over 20 years. The longer the bonds last, the more profit you can generate from this investment.

So, Which Investment Instrument is the Best for Beginners?

As mentioned earlier, there is no investment that comes with zero risks. Even bonds come with the interest rate risk, which might drop the interest rates paid to the bondholder annually should the market interest rate rise. You could either watch the risk and be satisfied with the securities that bring small returns or invest in the riskier securities and get better returns. The decision is up to you!

Stocks happen to be the riskiest form of investment, as there is no guarantee they will result in profits. Then again, they have a great return potential. Consider investing in different types of securities if you want to play safe without limiting your profits. Diversification is the key to a successful and risk-free deal. Diversifying your portfolio will help reduce risk and grow your profits. So, invest in stocks, mutual funds, and bonds to increase your earning potential.

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