Investors have several options to choose from when deciding how to invest funds.
To start, it’s important for investors to understand the difference between owning individual securities and a pooled investment vehicle (such as mutual funds and ETFs).
Pooled Investment Vehicles: Mutual Funds and ETFs
A pooled investment vehicle is a collection of funds from multiple investors used to fund an investment. Such vehicles can typically make larger-scale investments than an individual investor could, effectively driving down the cost of buying and selling.
Additionally, pooled investment vehicles like mutual funds and ETFs tend to hold multiple securities, potentially offering diversification benefits to investors (compared to investing in individual securities). Furthermore, these investments are managed by a team of investment professionals, which may offload one of the most intimidating parts of investing: stock picking.
A mutual fund is an open-end investment vehicle that pools investor money to invest in bonds, stocks, or other securities. One way to buy and sell mutual funds in an investment account is at a brokerage.
See more: The Investor’s Guide to Registered and Non-Registered Accounts
Like mutual funds, ETFs are open-end investment vehicles that pool investor money to invest in bonds, stocks, or other securities. A key difference, however, is how ETFs are bought and sold. ETFs trade like individual stocks on major exchanges and can be bought or sold anytime during the trading day.
Individual Securities
Some investors may invest in individual securities, such as bonds or stocks, instead of pooled investment vehicles. Individual securities may offer more customization and transparency. Additionally, those more concentrated may offer better returns, as investors may better understand what they own if they are familiar with the associated company.
Furthermore, by investing in individual securities, an investor does not have to pay a management fee charged by mutual funds and ETFs. However, individual securities carry concentration risk by their nature as they lack the diversification of pooled investments.
Bonds, also known as fixed income securities, are a form of securitized debt representing a loan the purchaser (bondholder) makes to the issuer. Bonds can be issued by companies or a government.
Bonds have a defined interest rate and duration and generally will pay interest at regular intervals, such as quarterly, biannually, or annually, until maturity. At the time of maturity, the issuer typically repays the bondholder the original face value of the bond, plus interest.
Stocks, or equities, represent shares in a company’s ownership. Owners of common shares are typically entitled to vote on the selection of directors and other important matters.
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