By: Aditi Bhatt
Youth are often told to begin investing as soon as possible as time is of the essence. Although, “only 37% of those younger than 35 invest in the stock market compared to 61% of people 35 and older who have stock ownership” (Gallup poll, 2018). We understand that investing can be scary because of all the jargon, but it doesn’t have to be. Here are four types of popular investments:
Stocks or shares represent fractional ownership of a company. The success or failure of a company, stock type, and the stock market determines whether you will lose or earn money on a stock. The two main ways to make money with stocks are through dividends and capital gains. To avoid losing money in the stock market, “using portfolio diversification is your best bet” according to David Golden, a microeconomics teacher at Northside College Preparatory High School. Portfolio diversification is “a risk management strategy that mixes a wide variety of investments within a portfolio” (Investopedia, 2021). Hence, it is wise to invest in mutual funds, which is a combined holding of stocks, bonds, and other assets from multiple entities.
Mutual funds are a popular investment because of built-in diversification and professional management. There are both bond and stock mutual funds. Exchange-traded funds (ETFs), merge characteristics of both mutual funds and conventional stocks. More specifically, ETFs are diversified portfolios that are professionally managed as well, but ETFs can be bought and sold throughout the trading day, unlike mutual funds. Index funds are a type of mutual fund or ETF with a portfolio constructed to match the components of a financial market index (a hypothetical portfolio representing a segment of the financial market). Three popular indexes for tracking the performance of the U.S. market are the S&P 500 Index, Dow Jones Industrial Average (DJIA), and the Nasdaq Composite index. Both mutual funds and ETFs are generally considered safer than individual stocks but still carry risk.
Bonds, on the other hand, are generally safer investments. A bond is a loan an investor makes to a corporation, the government, or any other organization. In return, the investor receives interest payments over a specified period and gets the principal amount at the bond’s maturity date.
These are just a few of the many investment options available. According to Anthony Ryan, a lead electronic commodities options market maker, “a good rule of thumb to follow is do not invest in anything you do not understand.” All investments have some level of risk associated with them, but these risks can be mitigated with careful planning.