Defining your investment plan
When choosing the best way to invest in the stock market, it is good to look at a few items that make up the stock market. Knowing what stocks, ETFs, and mutual funds are is essential in determining the best action plan when investing.
Through this knowledge, one hopes to understand better what stocks, ETFs, and Mutual funds are.
Stocks
The definition of a stock is:
“In finance, stock consists of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares”.
When one buys a share of Microsoft, Facebook, or Tesla, they become a fractional company owner. Stocks allow stockholders to vote on board members and give the stockholder the potential to receive dividends.
When someone invests aggressively, they would have a portfolio made up almost entirely of stocks. Stocks are risky, as they measure a given company's performance and perceived value. If a company is deemed worthless, then so is your proportional ownership in that company.
The pro of a stock is that a stockholder can benefit from growth in a company, long-lasting performance in the form of dividends, and a small say in what is happening in the company.
ETFs
The definition of an Exchange Traded Fund (ETF) is:
“A marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.”
The best metaphor to explain ETFs is in the definition. It is a basket. Within that basket are multiple assets. Let’s say that someone thinks the S&P 500, which tracks the performance of the 500 most valuable companies in the USA, is the best “basket” to invest in. Well, there is an ETF for that. Custodial companies like Schwab, Vanguard, and Fidelity have their own ETFs that track the S&P 500.
Although Exchange Traded Funds (ETFs) take two days to settle, their price is always live during market hours, just like a stock. It is constantly fluctuating during that time too. What is made up of this basket depends entirely on what the ETF was created to track. It does not change.
Mutual Funds
The definition of a Mutual Fund is:
“A professionally managed investment fund that pools money from many investors to purchase securities.”
Mutual Funds have a fund manager. This person decides what comes in and out of the mutual fund and acts accordingly based on market trends. They take the pooled money and diversify the fund for those who buy into it.
Mutual fund pricing is not live and is updated at the market’s closing of each trading day. The mutual fund also comes with a management fee for purchasing into their fund.
The power of speaking with your advisor
Everyone has different goals and risk tolerances, and that is why it is important to speak with your advisor to make sure your assets are allocated appropriately.
If you have more questions, be sure to reach out to your Financial Advisor today.