Warning: this post is designed for beginners to investing.
Investing can sound like a fancy word, but it is really just about making your money work for you. And to get started, it is helpful to know about three main things: stocks, bonds, and mutual funds.
Stocks:
Think of stocks as owning a piece of a company. When you buy stocks, you are becoming a part-owner, sharing in the company's profits and losses. Sometimes, companies pay out a part of their profits to shareholders as a “thank you”, called dividends. And if the company does well, the value of your shares can go up, giving you a chance to sell them for more than you paid.
Key Points about Stocks
- High Risk, High Reward: Stocks can be exciting because they offer the potential for big gains, but they can also be risky. The value of stocks can go up and down a lot depending on how the company is doing and what is happening in the world.
- Dividends and Capital Gains: Some stocks pay dividends, which are a portion of the company's profits distributed to shareholders. Additionally, investors can profit from capital gains when they sell their shares for a higher price than they paid.
- Types of Stocks: Stocks can be categorized into different types based on factors like company size (large-cap, mid-cap, small-cap), growth potential (growth, value), price behavior (low volatility, momentum, etc.) or sector (technology, healthcare, consumer goods, etc.).
Bonds
Bonds are like loans. When you buy a bond, you are lending money to a government or a business. In return, they promise to pay you back the money you loaned them plus some extra, called interest, at a later date.
Key Points about Bonds:
- Steady Income: Bonds are often seen as a safer option because they provide a regular income through interest payments.
- Less Risky: Compared to stocks, bonds are generally considered safer, but they also tend to offer lower returns. Be mindful that there are some riskier bonds (named “highyield” or issued by emerging markets) that can have higher risk than stocks but can also generate higher returns via price appreciation.
- Types of Bonds: Bonds come in various types, including government bonds, municipal bonds (= typical of the US market only), or corporate bonds. They can also have different maturity periods, ranging from short-term (0-3 years) to long-term(over 10 years).
Mutual Funds:
Think of them as a team effort. When you invest in a mutual fund, you are joining a group of people who pool their money together. A professional manager then invests that money in a bunch of different stocks, bonds, or other assets.
Key Points about Mutual Funds:
- Spread and Diversify Your Risk: One of the great things about mutual funds is that they spread your money across many different investments, reducing your risk.
- Let the Professionals Handle It: You do not have to worry about picking individual stocks or bonds; the fund manager takes care of that for you.
- Types of Mutual Funds: Mutual funds come in various types, including equity funds (investing primarily in stocks), bond funds (investing primarily in bonds), balanced funds (investing in both stocks and bonds), index funds (tracking a specific market index, such as the famous ETFs also called passive indices), and sector funds (investing in specific sectors).
To conclude, stocks, bonds, and mutual funds are the basic tools of investing. Each has its own pros and cons, so it is important to understand them before jumping in. Remember, investing is a journey, so take your time, do your research, and consider seeking advice from a professional if you are unsure.
If you want to dig deeper, take a look at our investment guides here – (written for levels from beginners to advanced):
Get in touch if you have any questions: hello@pantar.ai
Happy Investing with Pantar.ai!
