Four Securities Everyone Should Know

What is a security? A security is a financial instrument that holds some type of monetary value. A little ambiguous? I think so too. Many people don’t think they are “investing” if they participate in their company’s 401k plan, have an IRA, or have a financial advisor. However, even if you aren’t “trading stocks” you are still investing! A few security types make up the bulk of investing such as stocks, bonds, mutual funds, and index funds. Today, we’re giving you a breakdown on what you need to know about these securities to stay informed. You don’t need to know the ins and outs of the stock market to start investing:

  1. Stock

    • A stock is a security that represents ownership in a corporation.

    • Stock is represented in terms of “shares”

    • You are referred to as a shareholder if you own stock

    • Stock is also known as “equity”

    • If you are a shareholder, you have claim to the company’s assets and earnings

    • You make money as a shareholder by the company performing well

    • Buying stock in companies that you trust and think have a good future is where most first-time shareholders start

    • You can only by stock directly from an online platform (etrade, t.d. ameritrade, schwab) or through a financial advisor

  2. Bond

    • A bond is a security where the investor loans money to the government or corporation in exchange for receiving a premium back

    • Owners of bonds are referred to as credit holders or debt holders

    • A bond is also known as “debt” but in this case you are the one who is doing the loaning, not the other way around

    • Bonds are directly impacted by the interest rates, higher the interest rates = higher amount of money you receive back

    • Bonds are seen as more stable securities because you know the exact amount of money you should receive back

    • It is hard to make money with bonds when interest rates are low

    • You can still lose money with risky borrowers if you purchase junk bonds or high yield bonds

    • Example: 2008 stock market crashed with bonds because people could not pay their mortgages/debt

  3. Mutual Funds

    • A mutual fund is a collection of securities bundled into one, larger fund

    • Mutual funds are active investments meaning they have a portfolio manager who chooses what is inside the fund

    • Mutual funds were created to offset the risk of being invested in just one security

    • Mutual funds collect similar security types with the same objective

    • Mutual funds can be made up of stocks and bonds

    • Example: Large-Cap Value Growth Fund is a collection of large capitalization companies like P&G, Ford, Coca-Cola, and Amazon with the objective of future growth

    • Most retirement plans (401k, SEP IRA, Simple IRA, 403b) are made up of mutual funds

    • Mutual funds can be bad investments if they are not low-cost

    • Low-cost mutual funds can be found at Fidelity, Vanguard, and Schwab

    • Vanguard is the leader in low-cost mutual funds

  4. Index Funds

    • Index funds are a type of mutual fund that tracks a portion of a market index like the S&P 500

    • Index funds are passive investments meaning they do not have a manager who actively trades

    • Due to their passive nature, index funds have low operating expenses and low portfolio turnover

    • Their biggest advantage is their low expenses

    • Index funds should cost less than 1%

    • Index funds typically outperform active funds making them a great investment

There you have it! Four investments everyone should know. Did you already know some of these? Are you surprised at how similar these are? Let me know!