Stockology

Things you can invest in are sometimes called investment vehicles or financial instruments. Normally, when you think about the market, you think stocks or mutual funds. A stock is a share of a company that you can buy or sell. A mutual fund, and there are many types, is typically a basket of stocks that you can buy or sell.

A quick bit: People buy mutual funds for several reasons. The two more prevalent ones are 1) because they don’t have time to track a group of companies, instead electing a professional fund manager to manage their money for them, and 2) to diversify their holdings, diminishing risk, since mutual funds include a bunch of companies (and if one company went bankrupt, it won’t completely wipe you out).

There are a whole lot of other things you can invest in, namely bonds, options, index funds, and exchange traded funds (ETFs). And while becoming an expert on each of these will literally explode your brain, you should have an idea of what each of these are. Ignorance and obliviousness is not rewarded in investing.

Bonds, and there are many types of these as well, are debts. Treasury bonds are issued by the government. Municipal bonds are issued by a municipality. Corporate bonds are the debts issued by a company. When you buy a bond, you’ll get paid interest. Bonds are less risky than stocks in general. The government isn’t going to collapse, so you don’t have to worry about your interest payments not coming through. I don’t want to get too into detail for now. So just know that investing in bonds can be an alternative or a complement to investing in stocks. Bonds are also known as fixed income securities because they pay out a fixed interest rate to their investors.

You can visit http://www.investopedia.com for more detailed explanations of each.

Moving on…

Options are part of a more general group of securities called derivatives. These aren’t the derivatives you learned you in your high school calculus class, but there is a correlation. Options are called derivatives because their price is derived from something else. I’m sure there will be a future post on how options work and all that good stuff. But for now, just know that options are contracts that give you the right to buy or sell a stock at a given price. The concept is actually really simple, but there’s a lot of ground to cover and I’m still learning it myself.

We kind of touched on mutual funds earlier, so now we’ll briefly touch on index funds and exchange traded funds (commonly known as ETFs). Index funds, as the name might suggest, track an index. I wrote about indices in an earlier post. So we know that the Dow Jones Industrial Average (DJIA), and there’s a fund that tracks that index. Likewise for the S&P 500 and Nasdaq indices. There are also indices that track a particular industry (like oil, technology, financials), or track a particular region (like Europe, emerging markets, etc.).

Exchange traded funds are essentially mutual funds that trade like a stock. For a conventional mutual fund, say the Fidelity Real Estate Fund, you’d have to have an account with Fidelity Investments to buy it. But for exchange traded funds, you buy shares just like you would for a stock. Nowadays, a lot of companies offer exchange traded funds. The more popular ones include iShares, PowerShares, and ProShares.

There have been volumes of books and tons of articles written on each of these instruments. And there are new bonds, options, and funds (especially) created every single day. So this is just a little recap of what each of them are.