3 Products to Know Before Investing
Investing, the one thing we all know we should be doing, but many neglect out of…fear? Ignorance? Lack of education?
No matter your reason, you need to be investing before it’s too late. Otherwise you’ll be a Walmart greeter until you die (nothing against Walmart greeters).
However, if you’re new to investing odds are you have no idea where to start or what to do. If you’re thinking this article will tell you what to do I’m sorry, but you’ll have to keep searching.
I’m here simply to explain what I believe to be the 3 most important products you should know about before investing in the market. From there, I suggest you consult your financial adviser or Uncle or lucky 8-ball…but really, consult a trusted financial professional before doing anything.
Mutual Funds
First up, mutual funds. You’ve likely been exposed to mutual funds without even knowing it. They’re in your 401(k) plans, advertised on television and discussed when planning a proper portfolio.
A mutual fund is an investment product that is made up of assets, typically stocks, to track a certain index or benchmark, such as the S&P 500. The goal with a mutual fund is you’re able to gain a broad market exposure, limiting your sector or company specific risk.
The mutual fund is managed by the fund manager, who’s duty is to ensure the mutual fund is performing as it should and costs remain in check. Without a manager, the fund could turn into a risk and even cease to trade.
Now, when looking into a mutual fund you’ll want a fund that meets your investment objectives and has a low expense ratio. An expense ratio is the annual cost to you the investor, for investing your money into a particular fund. The lower the expense ratio, the higher your overall return.
Mutual funds are designed to by long-term investment vehicles, hence why they are nearly always in a 401(k) plan. Keep in mind that some mutual funds have an investment minimum, which keeps the frictional costs (trading costs) low.
There are several hundreds of mutual funds on the market, which is why if you are unfamiliar with the markets you should consult a financial professional
Exchange Traded Fund (ETF)
The second product you should know about are Exchange Traded Funds, or ETF’s. These products are very similar to a mutual fund, with the exception they trade on the open market, where as a mutual fund settles one time at the end of the day.
An ETF is designed to be more liquid than a mutual fund, meaning you can enter and exit a position with ease. However, they are still a great product to own for long-term investing.
ETF products still have an expense ratio and are made up of a basket of underlying securities. The ETF is also managed by a fund manager to ensure it is acting in accordance with the fund’s purpose.
This product is less common in a 401(k), but can certainly be added to a traditional IRA portfolio or traditional brokerage account. Again, you’ll want to consult with your financial professional before investing.
Stocks
Last on the list are stocks, which arguably are the most known asset on the market. Stocks are shares of a company that are traded on exchanges. Purchasing a stock gives you partial ownership of the company and the ability to benefit from stock appreciation should the company perform well. However, if the company performs poorly you will potentially incur losses.
Stocks are on the riskier side of the 3 products discussed, but with increased risk comes increased reward. Purchasing a stock is simple, but like ETF’s, it typically needs to be done in an IRA or traditional brokerage account.
Some items to consider with stocks include company specific risk. This means you’re at risk of company specific shortfalls such as high leverage, over-spending and even sector risk. These risk may or may not be indicative of the market as a whole.
When selecting stocks, you’ll want to consider items such as their financial health, earnings, dividends and historic performance. Stocks are something you’ll certainly want to consult your financial adviser on.
These are the three products I believe you should know about before entering the market. There are endless investment products but with these basics you should be good to take your next steps to building wealth.
If you have any questions, want to see a specific topic or want to collaborate, send me an email at nyoung@youngfreelancing.com.
