If you’re interested in building an investment portfolio, you need to review your investment options and see how they fit into your short-term and long-term investment plans. If you want to have the best chance at good returns, focus on exchange traded funds (ETFs), stocks, and mutual funds.
Doing so will give you the latitude required to invest in companies that will expand your opportunities for creating wealth. So, which of these methods offers the greatest risk and which is better for securing wealth?
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A Reasonable ETF Explanation for Choosing the Investment
You can only answer those questions for yourself, as you will need to first define the above investments and look at their advantages and drawbacks. For example, a reasonable ETF explanation for investing in an ETF is the fact that the fund features several securities – all which diversify a portfolio and lower risk.
Therefore, trading ETFs greatly reduces the risk associated with investing in individual stocks.
Although you’re putting all your “eggs in one basket” of a fund account, the diversification of the stocks makes the practice less risky.
If you don’t have time to scrutinize stock choices, choosing an ETF or several ETFs is probably the best way to increase your return on investment and diversify your holdings.
Plus, the expenses involved with maintaining an ETF are not cost-prohibitive. So, if you want to ultimately see gains and improve your financial standing, you’ll find trading ETFs can be a smart money move to make.
Stock Investments and Risks
For people who enjoy trading stocks, the choices are endless. You can choose from growth stocks and value stocks in a large number of industries. Through hands-on trading experiences, you can get acquainted with a glossary of stock terms as well as graphs related to a stock’s activity.
How Stock Investing Works
In basic terms, investing in a stock means you’re investing in a company as a part owner. As you buy more of a security, you increase your influence and stake in the business.
Therefore, you have made a small claim to what a company owns. As an owner and a shareowner, you’re entitled to receive dividends – a small part of a company’s earnings, as well as voting privileges.
Investing in Common Stocks
While a value stock or growth stock indicates how investors perceive a stock, common and preferred stocks define the type of stock.
Most stocks are issued as common stocks, and, as noted, represent an investor’s ownership in a business and what he or she earns in dividends (a part of the profits).
Over time, common stocks, through capital growth, typically realize higher returns than other types of investments. However, if a company goes bankrupt, the common stock shareholders are typically paid last.
Preferred Stock Investments
Preferred stockholders also own a share in a company. However, they don’t enjoy the same voting rights as common stock investors.
Unlike common stock shareholders, however, preferred shareholders do receive a fixed and guaranteed dividend. Common stock shareholders receive variable dividends which are not guaranteed.
A preferred stock is also a callable stock. This means a company may buy the shares from preferred stock investors at any time. Businesses that buy back preferred stocks often pay a premium to do so.
Defining Growth Stocks
Growth stocks, as the name suggests, show substantially higher growth rates, or grow quicker than average stocks on Nasdaq and the New York Stock Exchange. The stocks pay no or low dividends as the companies generally reinvest retained earnings to boost revenues.
A company that is considered a growth stock typically has a competitive edge over other businesses in its field. This allows a growth business to acquire a unique selling proposition (USP) – an attribute that allows a company to continue to expand.
As a result, investors who invest in growth stocks are usually committed to the process. By their continued investments, they can generate significant profits through capital gains over time. Because growth stocks offer a good deal of promise over the long term, the risk is much higher over the shorter term.
Types of Growth Stocks
Equities that represent growth stocks include Facebook, Amazon, or Google (Alphabet) while value stocks include securities such as Exxon, Wells Fargo, or AT&T.
Defining Value Stocks
Value stocks are often considered undervalued when compared to their balance sheets. Therefore, they represent stocks that long-term investors normally prefer.
However, value stocks are still considered riskier than growth stocks, as investors view them with more cynicism. For a value stock to make a gain, traders must change their perception of the business.
Investing in Blended ETFs
You can lessen the risks involved in trading stocks, however, by focusing on investing in ETFs. ETFs include both value and growth stocks, so you can trade a nice mix of investments.
Yes, there are value ETFs and growth ETFs, but you can also trade ETFs that feature both value and growth stocks. If you see the intelligence of using both strategies, you might focus on ETFs that blend the two.
How Mutual Funds Differ from ETFs
Mutual funds differ from ETFs as they are not traded like stocks on the exchange. While mutual funds contain a portfolio of securities, they are still purchased on the exchange at the conclusion of a trading day. Traders buy mutual funds at a pre-figured price or a net asset amount.
Taxes are also figured differently on mutual funds than on ETFs. For instance, you may have to pay capital gains tax on the profits made in a mutual fund during the investment’s lifetime.
Moreover, active mutual fund managers frequently trade shares more often than fund managers of ETFs. Unlike a mutual fund, you’ll only incur a capital gains tax if you sell an ETF that has produced a profit.
Also, a mutual fund investor may be exposed to taxation on both short-term and long-term taxable gains – a fact that makes an ETF, or even a diversified stock portfolio, more attractive.
Final Thoughts about Investing
Whether you choose to invest in an ETF, stocks, or a mutual fund will be based on how comfortable you are with assuming risk or taxation. For many traders today, ETFs offer lower risks, more flexibility, and, in the end, a more positive cash flow.
