Where should you put your investment money? What should you trade? These are the big daunting questions. With more than 28,000 symbols in the markets how do you pick?
My first rule is don’t take “tips”.
My second rule is don’t buy just because someone else says to.
Now with those rules out of the way let’s discuss your options. You have three basic choices from which you can choose or you can even mix all three.
The markets contain:
Stocks, which everybody has heard of, whether it be large companies like International Business Machines (known as IBM) and Ford (F), or small companies like Datalink (DTLK).
Mutual Funds which are groups of stocks, like Fidelity select Automotive (FSAVX) or Vanguard Dividend Growth (VDIGX).
ETFs which are similar to mutual funds except that the groups are not ‘managed’ and trade like stocks, for example: iShares Brazil (EWZ).
These are the primary types of stock market investments you may make. There are pluses and minus for each of these three basic investment types.
• Stocks – you can trade at any time, they may or may not pay dividends (which is like earning interest on your investment since the company is giving shareholders a share of its profits); but they can be more susceptible to either upward price jumps or downfalls.
• Mutual Funds – consist of many individual stocks and involve a manager who buys and sell the stocks making up the fund’s portfolio so that the funds value is more of a composite average of all the individual stocks which helps to reduce or average sudden changes in individual stock prices, which also reduces the chance of a major sudden loss and a major profit gain.
• ETFs – the abbreviation for Exchange Traded funds, are kind of a composite of stocks like mutual funds but they trade like stocks. Thus an ETF represents a portfolio of stocks as if it were a mutual fund; but it isn’t a mutual fund because the individual stocks are not ‘managed’ and sold or bought frequently like they are in a mutual fund.
ETFs are a relatively new product and have only become popular in recent years with many mutual fund investors switching to ETFS because of their ease of trading.
Your personal investment portfolio can contain any of these three basic investment types or a mix of all to give you a diversification of your portfolio. Diversification is extremely important and means something different to almost everyone. We will discuss diversification in another article.