The art of investing is a mystery to many, and the idea of playing an active role in your financial future can seem daunting. However, taking charge of your financial future can begin today by understanding basic investing terminology. Understanding what stocks, bonds, mutual funds and annuities are can provide a foundational understanding of the basics of investing.
When you buy a stock, it represents a percentage of ownership of the company that issued the stock. Stocks are also commonly referred to as equity. But why do corporations issue stocks? Often, companies issue stocks to help raise funds that cover their operation costs. There are two main types of stocks, preferred stock and common stock. Common stock allows stockholders to vote at meetings for shareholders while receiving dividends that the corporation pays. On the other hand, preferred stockholders can have a higher claim on earnings and assets. However, preferred stockholders typically do not have the same voting abilities as common stockholders.
Bonds are important tools that can bring diversity and balance to a portfolio. A bond is a loan taken out by a company from investors rather than a bank in exchange for capital. The company then pays interest to the investor at a rate that is predetermined. An essential distinction between stocks and bonds is that the characteristics of bonds vary based on a legal document that outlines these characteristics called an indenture. Some other important factors to keep in mind when investing in bonds are maturity, security, liquidation preference, coupon, tax status and capability.
A mutual fund is an investment program consisting of bonds, stocks and other securities. By investing in a mutual fund, individual or small investors gain access to professionally managed and diversified portfolios. The overall return of a mutual fund is also impacted by commissions, annual fees and expense ratios. It is common for retirement plans sponsored by employers to invest in mutual funds.
An annuity is an insurance contract issued by financial institutions where the invested funds are paid out in the future in a fixed income stream. Investors can invest in or purchase annuities with either lump-sum payments or monthly premiums. It is common for retirees to use annuities as they offer a guaranteed, consistent income stream. After investing in an annuity, the investor begins to receive payments after the annuitization period. These payments can either last for a fixed period of time or for the rest of the annuitant’s life.
In conclusion, investing can seem intimidating but understanding the basics of investing is an excellent first step to taking charge of your financial future. The financial advisors at Spinnaker Investment Group are readily available to aid you in taking the next step to secure your financial independence.