Friday, February 19, 2010

Stocks, Bonds, Mutual Funds, and CDs

How To Buy a Stock. Investors most commonly buy and trade stock through brokers. You can set up an account by depositing cash or stocks in a brokerage account. Firms like Charles Schwab and Citgroup's Smith Barney unit offer brokerage accounts that can be managed online or with a broker in person. If you prefer buying and selling stocks online, you can use sites like E-Trade or Ameritrade. Those are just two of the most well-known electronic brokerages, but many large firms have online options as well.

Bonds are a form of debt. Bonds are loans, or IOUs, but you serve as the bank. You loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts.

What Is A Mutual Fund. A mutual fund pools the assets of its investors and invests the money on behalf of those investors. The companies that issue these funds, such as Fidelity or Vanguard, manage the pool of money on the investors’ behalf. The underlying logic of mutual funds is that they provide diverse investments — in stocks, bonds and cash — without requiring investors to make separate purchases and trades. An individual would need more than $100,000 to build a similarly diversified portfolio of individual shares and bonds, but a mutual fund investor can send $1,000 to a fund company and find herself holding an ownership stake in a number of companies.

How To Buy A Mutual Fund. Picking the right mutual funds is a lot like selecting the right kinds of stocks to purchase. Among the similar strategic rules of thumb: watch the fees, diversify your holdings to mitigate your risk and don’t chase performance — think long-term. Let’s start with diversification. If your company has a 401(k) plan, you probably have a good number of funds to choose from. You don’t want to put all your eggs in one basket, so holding a diversified portfolio is important. A smart fund strategy mixes bond funds and stocks funds as well as funds that invest in domestic and overseas markets.

How To Invest In A Certificate of Deposit (CD). Certificates of deposit (CDs) make financial sense for people of all ages who want a low-risk investment to park cash they don’t plan to use immediately. If you won’t need your cash reserve the day after tomorrow or next week, you’ll likely want that money to earn a better rate of return than your checking account offers—without taking on too much risk. This is when a CD is useful.

(WSJ-Personal Finance How To Guides)

No comments: