Demystifying Investments

I might have lost half of you based on the title.

I don’t blame you.

Understanding just a few basics can get you started and will pay dividends long-term.

You don’t need to be an expert.

Now, to some of you this will be way too detailed, for others it won’t be detailed enough.

Either way, I think it will be enough detail to get you going on investing - let’s see how I do.

As always, I aim to inform and educate. This is not investment advice or a recommendation to buy or sell securities.
Investing involves risk so please do your own research.

Let’s dive in.

Most commonly, when people hear investing they think of stocks.

Stocks are ownership stakes in a company. When you purchase a stock, you become a shareholder in that company.

As a shareholder, if the company’s value increases, your stock value increases. Sometimes companies will give out a dividend to shareholders. Think of dividends as the company’s way of sharing its profits with you.

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Investing in individual stocks gives you the potential for high returns (think about those who bought apple stock in the 90s or NVIDIA before the recent AI run).

That potential for high returns can also go the other way. If something bad happens to that company or the overall market, all of your money could go down with it.

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Another common investment vehicle is bonds.

Bonds are a form of debt. They are often issued by companies or governments looking to raise money for a specific purpose.

“Returns” from the bond come in the form of a set interest rate paid back to you over the life of the bond. Investors like bonds for their predictability and stability.

Because they are often less risky than stocks, they tend to have lower rates of return.

That brings us to the concept of mutual funds, index funds, and ETFs.

While there are distinctions between each of them, their goal is unified: To provide a diversified investment option. When you purchase shares of these, they will be investing in many different things under the hood. This can include various stocks, bonds, real estate exposure, etc.

There are three types of funds to discuss:

• Broad Market Funds: Funds like the S&P 500 Index Fund indirectly invest in large portions of the economy, either within the U.S. or internationally. When you buy into a fund, for instance an S&P 500 fund, you are indirectly investing in stocks of 500 US-based companies. If one of the 500 companies increases in value, the fund will increase in value. Same with the downside, if one of the 500 drastically drops, your fund will take a dip, but the pain of that is ideally lessened by the other 499. That’s the beauty of diversification found in each of these types of funds.
• Sector Funds: These funds let investors invest in sectors like Technology, Energy, AI, Industrial, Real Estate, etc. While they can offer high returns if the sector grows, they also come with higher risk since all the investments are in a specific niche sector. That said, a Technology Sector Fund is still more diversified than buying an individual technology stock for example.
• Target Strategy Funds: These are also funds for specific goals. For example, Vanguard and other providers offer retirement target-date funds. These funds, such as the 2050 retirement fund, will change what they are invested in over time. It will start aggressively (likely heavily invested in stocks) and then over time, move money into less risky investments like bonds. These are often used in 401(k) plans and are another great option for those who want to be hands off.

All of these investment types can be purchased using a Brokerage Account which I referenced in a previous newsletter. You can buy and sell on your own or get the help of Registered Agents at your brokerage account.

There are countless other investment types out there including real-estate, commodities, and options/derivatives.

As you research those (and other investment options) always ensure you understand what you are investing in and any fees associated with that investment.