Are You Familiar With The Common Types Of Investments?
First-time investors often find the process intimidating and let's be honest - even those with an extensive portfolio may still not quite understand the complexities associated with investment risk strategies, rebalancing and other investment terms.
That is one of the many reasons why it is important to work with a trusted advisor who can help by answering your questions and providing education. With that in mind, we offer you a primer on some of the more common investment types to provide you with an overview of their characteristics.
Stocks
Stocks are perhaps the most well-known investment type. When you purchase a company’s stock or shares - you are purchasing an ownership interest in that company. Larger companies may be publicly traded, which means that you can buy stock. When you invest in stock - you are hoping that the price will increase after your purchase, which you could then sell for a profit. However, if the price of a stock falls and you sell - you will incur/realize capital losses. Another strategy you should familiarize yourself with is called tax-loss harvesting.
Tax-loss harvesting
By selling securities for less than what you originally paid for them, you incur/realize capital losses. These losses can offset capital gains and you can deduct them against regular income for tax savings. You can deduct as much as $3,000 in capital losses each year and carry forward additional losses to the following tax year. You just have to remember two things: 1) Tax-loss harvesting is only allowed in taxable accounts. 2) You must abide by the “wash sale” rule: you cannot claim a loss on a security if you buy the same or substantially identical security within a 60-day (30 days each before and after) window of liquidating your shares.
Bonds
Bonds are typically offered by businesses (corporate bonds) or government entities (municipal bonds) when they are seeking to raise money. Your purchase is therefore a loan to that entity.
Bonds accrue interest after they are purchased, which is payable when the bond matures. The maturity date is a pre-determined duration specified in your purchase agreement. At that point, you receive your principal plus interest. Rates of return for bonds are typically modest, though they generally carry lower risk than stocks. However, there is still risk. For instance, if you buy corporate bonds - the company could go out of business. If you buy government bonds - the government could default on their payment. U.S. Treasury bonds are generally considered to have lower risks than corporate and municipal bonds.
Mutual Funds
A mutual fund includes investments from multiple investors. The money is managed by a fund manager who selects the mutual fund’s securities. Mutual funds can include a variety of investments such as: stocks, bonds and other securities. Depending on their investments, a mutual fund can carry risks similar to stocks and bonds. However, investment diversification has the ability to lessen risk.
An index fund is a type of mutual fund that seeks to passively track an index. For instance, a NASDAQ index fund will try to mirror its performance to the NASDAQ by investing in companies from that index. Since indexed funds are not actively managed, they can be subject to underperformance.
Gold
Gold, like silver or crude oil, is a commodity that can be held as an investment. The price of commodities is based on supply as well as consumer fears, which can be impacted sharply by external factors, like political actions. Generally, investing in gold and other commodities could be considered risky or at least subject to different kinds of risks since precious metals and commodities typically lack earnings or other conventional metrics by which stocks and bonds may be valued.
If you have specific questions related to your own investment strategy or financial planning needs, we welcome you to call us at 302.234.5655 or email us atcontactus@covenantwealthstrategies.com to set up time to discuss further.