Investing sounds intimidating to the uninitiated, but a little knowledge can go a long way. If you're building a portfolio for the first time, set up a strong foundation with some of these common types of investments. Find them in a variety of places, including discount brokerage firms, mutual fund firms, banks and even the Treasury.Investments: Stocks Mutual funds Bonds TIPS REITs ETFs CDs Stocks One share of stock represents a slice of ownership in a business. Companies generally sell pieces of the business to the public in order to raise money. In return, stockholders may receive a share of company earnings through dividends. Investors who sell their stock after it has increased in value also benefit from capital appreciation.After an initial public offering, stocks are sold on the secondary market -- where most of the daily trading takes place.
Most financial planners recommend that individual investors put their money into stocks through mutual funds.Advantages and disadvantages of stocks Pros Individual stocks offer a potentially high rate of return, which is the reward investors expect for taking on risk. "Since the 1930s the stock market has done the best; the drawback is the volatility," says Carol Friedhoff, CFP and author of "Keep Investments Simple But Sweet." Stocks can make investors rich. But with individual stocks, it's difficult to accurately predict which companies will take off like a rocket and which ones will languish or even fizzle out altogether. Cons Downturns in the market or within an industry can hit individual stocks pretty hard. "With an individual security you pick up something that is called nonsystemic risk, and that is the risk associated with one particular stock, associated with the management team of the company, their financial situation and the industry that they're in," says Kevin Brosious, CPA, CFP and president of Wealth Management Inc., in Allentown, Pa. It's a risky bet. Diversification mitigates risk, so in order to avoid exposing all of your money to the twists and turns of a few individual stocks, spreading your money over several investments makes the most sense. "If you're putting money directly into stocks, you really need to have a large amount of assets because you want to have a number of different stocks," says Mike Flower, managing partner in Financial Principles LLC, in Fairfield, N.J. "You can feel very strongly about a stock, but if it's more than 5 percent of your overall portfolio, then it really starts to direct the ship." He focuses on building a strong foundation with funds and then sprinkling in individual positions later, if at all. Investments: Stocks Mutual funds Bonds TIPS REITs ETFs CDs Mutual funds Mutual funds buy a bunch of different securities. Investors, in turn, buy shares of the funds. There are thousands of funds that buy lots of different things, but most of them simply own stocks or bonds or a combination of the two. Others focus on specific sectors such as commodities, REITs, technology companies or even currencies.
One particular type of mutual fund has soared in popularity in recent years: the index fund. An index is a benchmark for the market as a whole. For instance, the Standard & Poor's 500, made up of 500 large-cap stocks, can be mimicked by index funds that hold roughly the same positions in the same proportions. "The larger the company, the more they're represented in the index," says Flower.
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