Learn the basics of investing

If you want to learn the basics of investing, you should read this article. Here you will learn all the important terms and their meaning. Read on to learn all about investing!

If you want to learn the basics of investing, you should read this article. Here you will learn all the important terms and their meaning. Read on to learn all about investing!

Investing can help you pursue your most important financial goals, but what should you invest in? The building blocks include stocks, bonds, cash equivalents and various kinds of funds. Understanding your choices can help you determine the right investments for you.

STOCK

HOW YOU EARN RETURNS:

Prices fluctuate based on investor demand. Stocks may also provide dividendsFootnote1 (money paid periodically to investors), which you can pocket or use to buy additional shares.

RISK:

Prices can rise, fall or even drop to zero. Younger or smaller companies, or those in industries with unpredictable revenues, may be riskier than larger, well-established corporations.

MIGHT BE RIGHT FOR YOU IF:

You like to research company fundamentals and are willing to take on risk of loss to get potentially higher returns.

FEES/COSTS:

You may pay a trading fee or commission every time you buy or sell shares.

BUY IT:

Through an account at a brokerage firm; may also be available directly from the company.

BOND

HOW YOU EARN RETURNS:

Interest is paid on the amount of the loan—the bond principal—generally at a predetermined rate and on a fixed schedule. At the end of a specified period, your principal is returned to you.

RISK:

Bond issuers promise to return your principal, but you could still lose your investment if they default. Bond prices typically fluctuate less than stock prices, but a rise in interest rates could reduce demand for existing bonds and push down prices.Footnote2

MIGHT BE RIGHT FOR YOU IF:

You are seeking an investment that provides a stream of income; bonds may provide some stability when markets are volatile.

FEES/COSTS:

You may pay a transaction fee when you buy, often in the form of a markup on the bond price that is a percentage of its value.

BUY IT:

Through an account at a brokerage firm or directly from the issuer.

CASH EQUIVALENT

HOW YOU EARN RETURNS:

Most cash equivalents pay interest.

RISK:

Your returns may not keep up with inflation and won’t offer the same opportunity for growth as higher risk investments. The principal of these investments can lose value, but the prices will typically fluctuate much less than stocks or bonds.

MIGHT BE RIGHT FOR YOU IF:

You have short-term spending needs or goals, or you don’t want to purchase riskier assets because you fear a market downturn. Be sure to request a prospectus from the fund company and read it carefully.

FEES/COSTS:

These vary depending on the kind of investment; there may be transaction fees and early withdrawal fees.

BUY IT:

Through an account at a brokerage firm.

MUTUAL FUND

HOW YOU EARN RETURNS:

Dividends, interest payments and investing profits from underlying investments may be distributed to shareholders. You can also make or lose money when you sell your shares.

RISK:

Prices can go up and down. Although the diversification of funds may help reduce their risk, it cannot protect against loss or ensure a profit.

MIGHT BE RIGHT FOR YOU IF:

You want a convenient, professionally managed solution to diversify your holdings.

FEES/COSTS:

Investors in a fund pay a fee for management, operating expenses and marketing—a cost known as the fund’s expense ratio. When you buy or sell shares of the fund, you may also pay a fixed transaction fee, or there may be a “load”—a cost based on a percentage of the fund’s value.

BUY IT:

Through your retirement plan, an account at a brokerage firm or directly from a mutual fund company.

EXCHANGE TRADED FUND

HOW YOU EARN RETURNS:

Prices fluctuate based on demand and the performance of underlying investments. When investments in an ETF pay dividends or interest, that cash is passed along to investors.

RISK:

Prices can go up and down. Although the diversification of ETFs may help reduce their risk, it cannot protect against loss or ensure a profit.

MIGHT BE RIGHT FOR YOU IF:

You want a convenient, diversified way to invest. If you want to limit taxes on investments, ETFs can be more tax-efficient than mutual funds.

FEES/COSTS:

Like mutual fund investors, owners of ETFs pay an expense ratio, but ETF costs tend to be much lower, in part because investments within an ETF trade less frequently than those in mutual funds. You may pay a trading fee or commission every time you buy or sell shares, though there are many commission-free ETF offerings.

BUY IT:

Through your retirement plan or an account at a brokerage firm.

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