The choices available to new investors can be very overwhelming. This can lead them to just give up and not invest at all. The financial industry noticed this and invented a way to limit the stress that investing can cause. Mutual funds are the result of this idea.
Mutual funds are pools of money investors give to a money manager, who agrees to run the fund and earn a higher return on the money than an average bank account would. In return, the manager will take a fixed fee based on the assets invested in the fund. Overtime, mutual funds have been broken up into focusing on certain sectors of the stock market. Most funds are owned by big financial companies, like Fidelity, who control a family of funds.
The best thing about mutual funds is it removes some of the stress from individual investors. Since the manager picks all the stocks, all investors need to do is invest with managers that have proven they can make money for clients. The disadvantage of mutual funds is the money managers and the fund gets paid whether then fund makes money or not. Sometimes the fees can wipe all profits investors make away.
Investors are the everyday people that make the stock market work. They invest parts of their salary to save for retirement. While investors don’t have the pull on the stock market like big mutual funds do, all companies target them since investors are the ones who buy mutual funds.
Investing for Beginners
It’s important for beginning investors to realize they don’t know everything about investing. While they want to invest on their own, it may be better for them to invest in funds that choose the stocks for them. E very one doesn’t have the time to research enough about each stock to invest in them.
Money markets are funds that give investors more interest than savings accounts but less than CD’s. Unlike a CD, they allow investors to withdraw their money without any penalty. The biggest drawback with money markets is they aren’t insured by the Federal Reserve, so they have a higher risk than other fixed income.
High yield bonds are bonds that pay higher interest rates than the average bond. They usually yield more because there is a greater risk in buying them opposed to other, safer bonds. These are usually issued by new companies, or by issuers who recently came out of bankruptcy.
Investing in Gold
With the price of gold increasing 300 dollars since September, 2007, there has been much interest in investing in gold. Gold investing can be done by either investing in devices that track the price, like gold futures or an ETF, or by buying physical gold. The easiest way is usually by buying a device that tracks the price.
Equity funds are mutual funds that invest in equities, or stocks. They are the most popular funds and therefore have the most money. Many specialize in certain stock areas, like growth, value, overseas, technology, etc This allows investors to pick and choose certain areas to invest in.
Emerging markets refer to countries that are moving from undeveloped country to developed country. They offer higher risk than a developed country, like the United States or Germany, but less than an underdeveloped country. Some examples are the countries of Eastern Europe and India. Many mutual funds specialize on just these countries.
Hedge funds are like mutual funds in the respect that they run other people’s money. Instead of taking a fee, they take a percentage of the money they make, usually around 20 percent. Also, they are only allowed to take money from investors who have a net worth of one million dollars or more. This limits the investors that can take advantage of the great opportunity hedge funds offer.
A technique used by many funds, market timing is the practice of trying to time the exact time to enter and exit a stock trade. This is usually done by a computer trading program that uses past data to determine when to buy and sell. It isn’t usually an effective tool for individual investors.