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INVESTMENTS
Mutual Funds
A large group of people pooling their money together to buy a selection
of stocks picked by a portfolio manager or portfolio management team.
Think of a pie, the portfolio manager or team is the baker and the stocks,
and bonds are the different ingredients. Everyone who buys a slice (shares)
gets the same ingredients and the more shares you buy the bigger the slice.
Some funds contain stocks only and some bonds only and others have both.
Mutual funds are first distinguished by the markets being invested such
as domestic or international and then broken up into strategies such as
growth, value or a combination of the two (blend) and subsequently broken
up by market capitalization (small, mid, and large). Some funds use a
combination of multiple strategies..
Fixed income mutual funds are organized first by origin (domestic or foreign),
then by credit quality (low, medium, high), and subsequently by duration
(short term, intermediate and long term). Some funds use a combination
of multiple strategies.
| Pros: | Cons: |
| In order
to diversify you would purchase different companies in different industries.
For one person to do so would be very expensive. But by buying a mutual
fund which may be diversified would be more cost effective. |
The mutual fund industry has grown from 65 funds to more than 3,000 funds. Some funds are very diversified and others are not. The mutual funds industry has become very confusing. Fund managers come and go. Many different strategies exist. Different funds have different fees. Some funds charge a load (commission) some don't (no load). |
Stocks
Represents ownership of a company, some pay dividends.
You are entitled to what's left after the bank creditors, bond holders
and preferred stock holders get their share during liquidation. Shareholders
participate in the companies’ earnings and growth through stock
price increases and/or dividends.
Bonds
Represents a loan to the company. Each bond is worth $1,000(Face Value) which is quoted in percentages. A quote of 99 does NOT mean the bonds price is $99 the worth is $990 ($1,000 x 99%).
Preferred Stock
Has characteristics of stocks and bonds. The holders
are entitled to the company's dividends before the common stockholder.
Preferred stock is issued with a $25 face value and pays a dividend quarterly.
It is not considered debt for balance sheet purposes. And is perpetual
like stocks.
Municipal Bonds
The two types of municipal bonds are revenue and general
obligation. Revenue bonds are supported by the city or state project’s
revenue. General Obligation bonds are supported by the taxing power. Some
issues are insured. Municipal Bonds are loans to the state or city authority.
The pricing works the same as bonds above. The benefit of purchasing a
municipal bond of your city or state is that interest earned is triple
tax free; which means that interest is not subject to federal, state and
city tax. So if you live in NY and purchase a bond issued by the NYC MTA
then the interest is tax-free, if you live in New Jersey and purchase
the same bond you may be subject to state and city taxes.
Treasuries
Debt issued by the U.S Government, has the highest rating
and is considered the safest. Not insured nor guaranteed. The world would
be in really bad shape if the US was not to pay their obligations and
the last thing anyone would be worrying about is the few hundred thousand
that they would lose.
Certificates of Deposit
Liabilities issued by banks and lending institutions. FDIC insured by the federal government up to $100,000 per institution per person. Interest rates vary from institution to institution. Your money is locked in to a set rate for a specific time. If you cash in your CD early there is a penalty for a certain amount of months of interest.
