There are a vast number of investment opportunities available to
potential investors, but not all of them are right for all
purposes. The most common types of investments are stocks and
bonds. Stocks are shares of individual companies, while bonds
are government-issued investment funds. Both can be great for
starting in the investing market, but you should know a little
about the difference between the two before making your
investment.
Stocks
Stocks can help balance out a bond-heavy portfolio by providing
diversification
Stock dividends also receive more favorable tax treatment than
bond payouts.
If you make the decision that stocks may be the place for you to
put your investment dollars, you must now determine the primary
purpose of your stock investment.
The two primary stock investment goals are income and growth.
You can have a combination of the two in one stock investment,
but the features are almost never equal. In other words,
although growth and income may co-exist in a particular stock
investment, the investment choice you make should take into
account the primary strength of the stock.
Growth Stock vs. Income Stock
Growth stock is stock in a company that doesn't pay cash
dividends, but instead reinvests its profits into the company.
The idea behind this strategy is that the company will continue
to grow and become more profitable, driving the stock price up.
Income stock is stock in well-established companies that do not
need to reinvest their profits into their companies and
therefore use their profits to pay dividends to stockholders.
Income stock is often more expensive because the income stream
and security of the investment is greater.
Mutual Funds
Many investors invest in the stock market through mutual funds.
Mutual funds are professionally managed and are easier to
diversify your investments in, which makes them less risky than
investing in individual stocks. You still have to research what
type of stock will best suit your goals, but the average
investor finds it less stressful to invest in the stock market
through this method.
Bonds
Bonds, though some consider them "safer" than stocks, still come
with risks. Some bond funds offer enticing payouts but may take
big chances to do so, including venturing into lower-quality and
longer-duration credits; if your funds' bonds lose value, you
could see your principal shrink even though you're pocketing a
healthy yield. Checking a fund's quarterly losses can be an easy
way to see whether you could stomach a given fund's short-term
losses. There's nothing wrong with making room for some
higher-yielding bond funds around the margins of your portfolio,
but consider these income-heavy funds to be side items because
of their greater potential for volatility.
And while paying for high-quality financial advice can be money
well spent, think carefully before paying a sales charge for a
bond fund. If you're paying a 3.75% load to buy a bond fund (and
that's a pretty low load), you're surrendering most of your
first year's income payments from the get-go.
Individual Bonds vs. Bond Funds Many investors prefer to invest
in individual bonds rather than bond funds. While that's a
reasonable tack if you're buying Treasury securities or perhaps
even extremely high-quality corporate bonds, it makes sense to
opt for a professionally managed bond fund for every other type
of fixed-income security. Not only will a mutual fund offer you
much more diversification (and therefore lower risk) than you
could obtain by buying individual bonds, but smaller investors
who are buying and selling individual bonds are also at a big
disadvantage when it comes to trading costs.
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