A lot of “investment” advice is given throughout the world. This advice is given by large market firms, friends and relatives, or reading information online. Medmatchplus+ decided to start an investment series to help individuals wonder through the path of investments and retirement funds. We want to use this opportunity to tell you investment tips that we have used in the past that may have worked or failed. Our goal is to help you succeed! We are offering this for free – our point is that we are not trying to sell you a TV video series or online course.
For our first piece of advice – When should I begin investing? The answer is as soon as you can. It is important to remember putting away 100$ a month in an ETF (Exchange Traded Fund) or other vehicle early, can pay large dividends towards the end of your career.
In the above chart, you quickly realize that investing money early on can easily double your retirement fund at 67. Compound interest is the tool that allows this to occur (interest on interest).
Let’s begin our discussion with a few broad definitions – Ex. What is a stock? What is a bond?
A stock is a tangible asset that signifies that you own part of a corporation. This “share” represents that you claim part of a corporation.(1) Two types of stock exist – Preferred and Common stock. This is where it begins to get a little complicated. Preferred stock holders typically receive their stock dividends before common stock holders. They are also ahead of common stock owners in receiving some of their capital back if the company goes bankrupt. This is important because common stock holders are the last to receive any type of capital if the company were to go bankrupt. Basically, we are saying – If company X goes bankrupt and you are a common stock holder, you may want to say goodbye to those assets. Common stock holders receive their profits by dividends from the company and if the share price rises (or falls) throughout the ownership of the share. Preferred stock holders typically have a pre-determined stock dividend (which is a lot higher than common stock holders).
A dividend is a payment made to a shareholder from a corporation. Typically, these payouts are made on a quarterly system (1st, 2nd, 3rd, and 4th) quarter payments, however this is not always the case. Corporations can also distribute stock dividend to stock owners.
A bond is a loan or “IOU” with a promise that a corporation or municipal body will pay you. You can think of it as you are serving as the fund and distributing a loan to that particular organization. For example, a company may sell you a bond to raise money for the creation of a new office. They sell this note and promise to pay back the money and also a percentage of interest.
An ETF (Exchange –Traded Fund) is a basket of stocks (or other assets) that can be traded like a common stock. The ETF’s price will change throughout the day as does a common stock does.(2)
One benefit of an ETF is that you get a diversified amount of stocks in a basket. For example, if you choose to purchase one share of Amazon®, the closing price of this stock on January 23, 2019 was $1,640.02. If you only had $2000 dollars to invest, would you buy only one share of Amazon? Instead you can purchase an ETF that contains a number of Amazon shares for $20.00 per share of ETF. In making this purchase, you now own a portion of Amazon, however are diversified in multiple other stock at the same time. Instead of owning one Amazon common share, you now own 100 shares of X ETF. We will explain in a later lesson why this is so powerful. One important thing to remember when purchasing an ETF is the “commission” or “expense ratio”. Different funds will cost different amounts of capital to maintain. ETFs can be traded immediately.
A mutual fund is very closely related to an ETF. This is also a collection of stocks (or other security) that can be traded on the exchange. This mix of securities is decided on by the portfolio investment manager. Mutual funds can only be purchased for a price that is calculated once per day at the end of the day, based on their net asset value (NAV). Risk involved in mutual funds and ETFs are decided on the assets they are invested in. For example, if mutual fund was solely invested in tobacco stocks, this may be a much riskier investment vs someone who purchased mutual funds invested in multiple sectors such as energy, healthcare and manufacturing. Please visit our friends at Vanguard – https://investor.vanguard.com/etf/etf-vs-mutual-fund – for more information regarding Mutual Funds vs ETFs. The main thing to understand at this juncture is that mutual funds and ETFs are collections of stocks.
We have just laid out a whirlwind of information for a new investor. “Google” a few of these terms to see specific examples to better explain what each of them represent. In part two of our series, we are going to discuss a Traditional IRA vs Roth IRA vs 401k. Stay tuned!
- Chen, James. “Stock”. https://www.investopedia.com/terms/s/stock.asp. Accessed January 14, 2019.
- Chen, James. “Exchange-Traded Fund (ETF)”. https://www.investopedia.com/terms/e/etf.asp. Updated January 16th, 2019. Accessed January 23, 2019.
Please remember, this is merely informational. Medmatchplus+ or any member of its staff does not endorse any of these investment techniques, and please remember we are not responsible for any losses you, a family member, or business accrues. Please consider this helpful information and not advice.