Investing

You can be easily confused by the abundance of existing investment opportunities. In order not to be trapped, read a brief description of the most common investing options with the maximum benefit to invest your money. This will help you choose the most appropriate way to increase your capital.

The basics of Investing

There are many types of investments and investing styles to choose from. Mutual funds, ETFs, individual stocks and bonds, closed-end mutual funds, real estate, various alternative investments and owning all or part of a business are just a few examples.

Stocks

Buying shares of stock gives the buyer the opportunity to participate in the company’s success via increases in the stock’s price and dividends that the company might declare. Shareholders have a claim on the company’s assets in the event of liquidation, but do not own the assets.

Holders of common stock have voting rights at shareholders’ meetings and the right to receive dividends if they are declared. Holders of preferred stock don’t have voting rights, but do receive preference in terms of the payment of any dividends over common shareholders. They also have a higher claim on company assets than holders of common stock.

Bonds

Bonds are debt instruments whereby an investor effectively is loaning money to a company or agency (the issuer) in exchange for periodic interest payments plus the return of the bond’s face amount when the bond matures. Bonds are issued by corporations, the federal government plus many states, municipalities and governmental agencies.

A typical corporate bond might have a face value of $1,000 and pay interest semi-annually. Interest on these bonds are fully taxable, but interest on municipal bonds is exempt from federal taxes and may be exempt from state taxes for residents of the issuing state. Bond prices move inversely with the direction of interest rates.

Mutual funds

A mutual fund is a pooled investing vehicle managed by an investment manager that allows investors to have their money invested in stocks, bonds or other investment vehicles as stated in the fund’s prospectus. Mutual funds are valued at the end of trading day and any transactions to buy or sell shares are executed after the market close as well.

Mutual funds can passively track stock or bond market indexes such as the S&P 500, the Barclay’s Aggregate Bond Index and many others. Other mutual funds are actively managed where the manager actively selects the stocks, bonds or other investments held by the fund. Actively managed mutual funds are generally more costly to own. A fund’s underlying expenses serve to reduce the net investment returns to the mutual fund shareholders.

ETFs

ETFs or exchange-traded funds are like mutual funds in many respects, but are traded on the stock exchange during the trading day just like shares of stock. Unlike mutual funds which are valued at the end of each trading day, ETFs are valued constantly while the markets are open.

Many ETFs track passive market indexes like the S&P 500, the Barclay’s Aggregate Bond Index, and the Russell 2000 index of small cap stocks and many others. In recent years, actively managed ETFs have come into being, as have so-called smart beta ETFs which create indexes based on “factors” such as quality, low volatility and momentum.

What is a stock broker?

Stock broker is a person or legal entity, acting as an intermediary in concluding transactions on the currency, commodity or stock exchange. Without his participation, direct access to trading, especially for individuals, is difficult or completely prohibited. Brokers work either on behalf of a client (principal) or on their own behalf. Commissions for support of the transaction can be appointed by the exchange committee (or by agreement of all parties involved).

Services provided by stock broker

Execution only

Orders are only executed by the stock broker without additional investing advice and possible nominal ownership of securities in the transaction.

Consulting Dealing

In addition to support of transactions, recommendations are provided based on market analysis. The final decision remains with the client and the broker is not responsible for any losses.

Discretionary Dealing

Transactions are concluded on behalf of the client without additional consultations on the assets selected by the broker. The contract regulates the minimum level of profit, commissions and bonuses for the year, the section of liability for losses and other conditions. Most of hedge funds work this way.

What Is a Brokerage Account?

A brokerage account is an investing account. Once you’ve deposited money into a brokerage account, you can start investing to financial institutions like stocks, bonds and mutual funds. Instead of being managed by a bank, however, it’s kept secure by a broker or brokerage firm. Investors have contracts with brokers to deposit funds and use those funds for stock trading purposes.

There are several types of brokerage accounts. Which is right for you will depend on your investing goals, what kind of investments you plan to purchase and how much help you’d like in choosing and managing those investments. Most brokerage firms charge a commission fee for every trade you make. Currently, the average tends to hover at just under $7 per trade.

It doesn’t matter if you trade 10 shares or 5,000 shares — you usually pay the same fee as long as you make the trade at the same time. In other words, if, for example, you buy 5,000 shares of a stock in two 2,500-share transactions, you’ll probably pay the commission fee twice.

What is an IRA?

An Individual Retirement Account (IRA) is an account designed for building retirement savings. Unlike an ordinary bank savings account, it allows you investing, such as mutual funds and stocks, and offers tax breaks that can save you thousands of dollars over the life of the account.

IRA benefits

Both of the primary varieties of IRAs — the traditional IRA and the Roth IRA — allow you to save $6,000 per year ($7,000 if you’re 50 or older), even if you’re also contributing to a 401(k) or other workplace savings plan.
With a traditional IRA, contributions are tax-deductible up to IRS limits, and you won’t owe income taxes until you withdraw the funds.
With a Roth IRA, contributions are not tax-deductible, but unlike with a traditional IRA, you can withdraw money tax-free in retirement from a Roth.
Average savings account interest rates have languished well below 1% for more than a decade, but you’ll find many of the investments available through IRAs have earned far higher returns over the long term.

Disclaimer

CreditNervana promises to keep our information as accurate and up-to-date as possible. However, you should always consult a financial advisor for specific questions about personal or business finances and investment opportunities, especially if you are looking in your area. Working with a trained professional who is familiar with your case is a safe and guaranteed way to make the best investment decision possible. Please review our terms and conditions before making any decision based on the information we provide. Financial institutions are constantly changing. Because of this, it’s a good idea to cross check the information you read here with any company you are considering working with.

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