Introduction to Investment Vehicles
Investment vehicles are tools designed to help individuals or institutions invest their money for the purpose of generating a higher return than what is available in a savings or checking account. Investment vehicles come in all shapes and sizes, but two of the most popular types are stocks and bonds. These two types of investments are usually the first ones to come to mind when thinking about the stock market or investing in general, however, there are a myriad of other investment options available to investors.
In this article, we will outline the different types of investment vehicles and provide an overview of some of the key characteristics and considerations associated with each in order to help you make an informed decision as to which vehicles are best suited for your individual goals. The goal of this article is to give you the information you need to make an educated decision when crafting your own investment strategy.
Stocks
Stock investments are likely the most widely recognized and popular form of investment vehicles. Stocks are essentially part-ownership in a particular company and when an investor owns a particular stock, they are generally entitled to dividends and income generated by the company. The potential for a stock investment to generate a return or income is much greater than with other types of investments such as bonds, due to the higher risks associated with stocks.
Types of Stocks
The two primary types of stocks available to investors are common and preferred stocks. Common stocks are essentially lower-risk and offer more potential for return. Preferred stocks, on the other hand, offer investors a guaranteed dividend and are usually less risky than common stocks.
Calculating Stock Returns
When calculating the return on a stock investment, the primary factors to consider are the market price of the stock and the dividends paid out by the company. The rate of return on a stock investment is determined by dividing the dividend by the market price of the stock and then multiplying that number by 100.
Bonds
Bonds are one of the other leading types of investments and are widely popular as a safer alternative to stocks. Bonds are considered a fixed-income security, meaning that the income or return generated from them is fixed from the moment of purchase. Bonds are sold at a face value, which is the amount the investor will receive at the end of the bond’s term. Generally, bonds are less risky than stocks - however, if the underlying company defaults, the investor losses their entire investment.
Types of Bonds
Bonds come in a wide variety of types and offer investors different levels of risk, return, duration, and other characteristics. Two of the most popular types of bond include corporate and government bonds. Corporate bonds are issued by companies as a means of raising funds, while government bonds are issued by governments as a way of raising money for projects or initiatives.
Calculating Bond Returns
Similar to stocks, the return on a bond is determined by dividing the income generated by the bond by the face value of the bond itself. The rate of return generated by a bond is typically lower than that of stocks due to the lower risk associated with them.
Mutual Funds
Mutual funds are a form of pooled investment that allow investors to buy shares in a professionally managed portfolio of stocks and bonds. Unsurprisingly, mutual funds are one of the most popularly traded investment vehicles. Mutual funds offer investors the potential for higher returns than individual stocks and bonds, as well as a more diversified portfolio.
Types of Mutual Funds
Mutual funds typically fall into one of two categories: open-end funds and closed-end funds. Open-end funds allow investors to buy and sell shares directly with the fund manager, while closed-end funds require investors to buy shares through the stock exchange.
Calculating Mutual Fund Returns
The rate of return generated by a mutual fund is determined by the total return of the portfolio multiplied by the fund's management expense ratio (MER). The MER is the fee charged by the fund manager for managing the fund and is typically between 0.25% and 2% annually.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are similar to mutual funds and are popular investments due to their low cost and relative stability. Unlike mutual funds, ETFs are traded on the stock exchange and, as such, costs associated with buying and selling ETFs are significantly lower.
Types of ETFs
ETFs are available in a variety of different markets, including stocks, bonds, commodities, and currencies. ETFs are generally classified as either index funds, actively managed funds, or commodity funds. Index funds are designed to match a particular index, such as the S&P 500, and actively managed funds are funds managed by a professional fund manager.
Calculating ETF Returns
The return on an ETF is determined by the underlying holdings of the fund and is generally lower than that of stocks and mutual funds due to the lower risk associated with ETFs. The return of an ETF is calculated by subtracting the fund's expenses from the total return of the underlying holdings.
Conclusion
The various types of investment vehicles available to investors offer numerous advantages. Whether you’re looking for a safe investment option, such as bonds or ETFs, or a more aggressive option, such as stocks, it’s important to understand the different characteristics and considerations associated with each type of investment. Knowing how to calculate the return on your investments is also essential to maximize gains and minimize losses.
The most important takeaway from this article is that you should do your own research before investing and understand the risks associated with each type of investment. Different types of investments are suited for different types of investors and goals, so it’s important to know what your goals and objectives are before investing. Armed with this knowledge, you can make sure to craft an investment strategy that is best suited for your individual needs.