There are literally unlimited investing products out there. And many of them are very difficult to understand for a beginner. Among these products are mutual funds, exchange traded funds, and stocks or equities.
Aside from stocks, taking a close second place in any kind of investing popularity ranking would be the mutual fund. Anyone with a company or government sponsored retirement portfolio has most of their money invested in mutual funds.
However, in spite of their popularity, mutual funds are not very much understood.
You can imagine a mutual fund as a collection. And the collection could be stocks, bonds, or nearly any product. Any fund that is managed actively has a team of managers and advisors, who attempt to beat the overall performance of the market.
For the person who has little to no investment experience, mutual funds offer a professionally managed product that should make money for you, without having to monitor a complicated portfolio.
The problem with mutual funds is that after fees, a majority of stock funds underperform the stock market and this isn’t really new.
Even though many stock funds underperform the market, passively managed index funds have lower costs and closely track the performance of the market.
Exchange-Traded Funds (ETFs)
Similar to mutual funds, exchange traded funds are often a basket of stocks, bonds, or other investment products, but not like mutual funds, ETFs are traded on the stock exchanges.
More importantly, ETFs do not attempt to beat the market like stock mutual funds. Rather, they reflect the performance of an index, sector, or other product.
ETFs continue to increase in popularity because of their low cost and their nature to reflect the market, rather than attempting to beat it. ETFs also have a higher degree of volatility since they are traded like stocks.
Equities, which is a more formal name for stocks, represent a small piece of limited ownership in a company. Shareholders are said to have limited liability rights because an equity holder is not liable, should the company be sued.
For investors who are looking for a product that has no fees, an equity is one of the few choices. Even though there will be a commission to buy and sell an equity, as well as nay fees paid to a financial advisor, equities are still one of the least expensive investment options.
Along with being a low-cost product, equities also have a high level of volatility. On any trading day, individual equities could rise or fall by 50 percent or more.
Along with volatility, it usually takes a lot of knowledge and experience to pick stocks that will rise in value. Stocks are appropriate for nearly every portfolio, but paying for the help of a financial advisor is the best choice for investors with little experience.
A diversified portfolio may have each of the aforementioned assets and investments. On the other hand, for younger investors looking for growth, mutual funds or ETFs that follow the performance of certain stocks may be the best option. Meanwhile, for those investors who are already at or getting near their retirement, bond mutual funds or bond ETFs should definitely be considered.