While many people are familiar with the terms mutual funds, bonds, and stock, when it comes to make decisions about their own investment options, all the surrounding rhetoric and language can oftentimes be confusing. In a word, many individuals do not know what option or options are best for their financial situation or when it comes time to choose the best route for their investments. So which one or ones should a person get?
Since many potential investors may not be entirely familiar with the terms – mutual funds, bonds, and stocks – here are some basic definitions.
What Are Mutual Funds?
Mutual funds are a mix of stocks, bonds and other investments. In addition, it is money pooled with other investors. That might not sound all that comforting, especially if the money is pooled with others. So why do people invest in mutual funds and what are the benefits? Many believe this is a more secure way to invest money, as it is not placed in one specific financial arena. According to the Securities and Exchange Commission (S.E.C.), Americans prefer mutual funds because they “offer the advantages of diversification and professional management.” The S.E.C. makes it clear that investors should be aware of the risks when investing in mutual funds and also the fees and taxes on transactions. Indeed, it is important to understand the various fees and tax codes that go with mutual bonds, both of which the S.E.C. clearly define on their site. Again, this information indicates that mutual funds are complex investments. That is why a money manager is oftentimes invaluable to help investors make sound decisions about their choice in mutual funds.
So, what exactly is a money manager, and why should an investor hire this type of financial professional? A money manager helps investors determine where it is best to invest their money. These professional relationships can be indispensable. Indeed, a money manager will learn precisely what the investor seeks – regarding returns (for both short-term and long-term goal) – and what she ultimately wants out of her financial portfolio. When choosing a money manager, it is important to do thorough research on the person and the company for whom they work. These individuals are a good choice because they are privy to information beyond public knowledge, have a great deal of expertise in handling investments, and oftentimes an extensive educational background in finance.
What Are Bonds?
Put simply, a bond is a debt instrument. The government – at the city, county, state, and federal levels – or a company sells bonds to investors. Many people prefer to invest in bonds because they are seen as safer than stock, are generally for long-investments and therefore offer better returns. While the definition is straightforward, there are six markets for buying bonds: municipal securities market, treasury securities market, federal agency securities market, corporate bond market, mortgage securities market and asset-backed securities market. Again, if an individual hires a money manager, these markets will be explained in great detail.
What Are Stocks?
Like bonds, stocks are securities. There are different types of stocks, so for the sake of clarity, capital stock will be defined. Capital stock is also quite different than bonds. When someone buys stock, he has a stake in the company for which the stock belongs. This also means the equity of the company plays a role in his gains or losses. More concisely, the investor is taking ownership of the company through the purchasing of stock for that incorporated business. Moreover, how much ownership is at stake, i.e., in terms of the assets and earnings of the company, depends upon the number of shares an investor determines to buy. Naturally, the more shares he owns leads to a greater vested interest and involvement in the performance of the company’s stock.
Again, this differs from bonds, which are, as already mentioned, debt instruments.
So, Which Should I Get?
So the question remains – which one or ones are best for investors?
If an investor feels uncertain about her decision, than mutual funds makes the most sense. One thing is clear: a first-time investor will be able to learn a great deal of information from a money manager. Furthermore, many investors keep money managers for years, if not a lifetime, and for good reason. But perhaps once an investor feels more confident and educated on investment options, she can explore investments on her own. When it comes to choosing between stocks or bonds, and it’s someone who is knowledgeable about these different types of investments, then that becomes a personal decision and is dependent upon what she wants out of her financial portfolio. As the saying goes, buyers know best. That is certainly true when someone is deciding what is best when it comes to returns on their investments.