What are the differences between various common investment tools?
We know that investing can sometimes feel like an overwhelming experience. With that said, the best thing to help with that is having some knowledge of investing and what you are investing in. Let us look at some various investment tools that are common to find in your investment account whether it is in an IRA, 401k, or a brokerage account. While there are other investment tools out there, for the purpose of this blog let's look at stocks, bonds, ETFs, and Mutual Funds and discuss their similarities and differences.
Stocks and Bonds
First, we know we can hold stock and bonds in our investments, the stock is essentially the same as owning a stake in something, and the bond is you lending money towards something whether that is a government, municipality, or even a corporation. You can buy and hold any stock available on US markets and even foreign markets. Therefore, you can own a share and be a part owner of just about any publicly traded company you want. For the bonds, you can buy individual bonds for such entities as the US Government, certain companies and even say your local city. These individual holdings allow you to pick and choose what you want to be a part of. Stocks settle in real-time, so when you buy or sell, that is when the strike price is generated. Bonds, usually have a price that someone agrees to buy it at, so that can delay the buying and selling process.
Mutual Funds
Mutual Funds are usually a basket of said stocks and bonds, and even other investment tools. Usually, a Mutual Fund has a fund manager or multiple fund managers who follow the directive of the said mutual fund. There is an abundance of mutual funds out there that allow you to buy a “basket” and hold multiple holdings in one “basket.” With mutual funds, the expenses are something you will want to keep an eye on, and the share class that the fund may be as that has a direct correlation with the fees on the mutual fund. That is a conversation for another day but be aware that there are different fund classes for different objectives. Another important aspect of the mutual fund is they generally trade at the end of the day, so if you are buying and selling it is the price at the end of the day that matters.
ETFs - Exchange-Traded Funds
Finally, for the purpose of this article, we will look at an ETF, an ETF is a basket just like a Mutual fund, but they generally lower fees and don’t have the same restrictions. An ETF can do such things as follow an active index like the S&P 500 so an ETF Index fund will hold all the stocks in the S&P 500 at its current weighting. So, this is a good more modern alternative in our opinion than most mutual funds. ETFs also trade in real-time, just like a stock so when you execute the buy or sell that is the price received, it will not wait until the end of the day like a mutual fund.
In conclusion, there is an abundance of investment tools out there and it is important that you do the research or work with a financial advisor to help you understand the fundamentals of said investment tools. They all act differently and do different things, so make sure you take the time to understand the objectives of your investment plan as well as the risk associated with it.
This is being provided for informational purposes only. The views expressed are those of Silver State Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC, DBA Silver State Wealth Management, an SEC registered investment adviser.