We recently hosted a Bonus Evening Session, simply titled “Investments.” Well, it wasn’t a simple discussion once we dove into the inner workings of various investment types, their respective advantages and drawbacks, and fee structures. In true Back to Basics form, I want to share the definition of each investment type to familiarize you with the building blocks of an investment portfolio. If you would like us to offer this session again, please send an email to Dave@FourthDimensionFinancial.com and simply type: “Investments”
Here are the working definitions of the most common investment products:
Definition of ‘Stock’
A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
Also known as “shares” or “equity.”
Definition of ‘Bond’
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.
Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
Definition of ‘Mutual Fund’
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Definition of ‘Index Fund’
A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
Definition of ‘Exchange-Traded Fund – ETF’
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.