Just an interesting question: What to do if you don't have the decrement to chose a good mutual fund, or what should I look for in a good mutual fund?

Don't choose your own. Choose a financial advisor who works through one of the larger networks of advisors, and take your chances.

My father works for a financial institution, and even though his work is unrelated to the normal functions of one (such as actual investment of advising), I am not legally able to invest in stocks myself (without them). What would the next best option be?

Save. When you attain your majority (probably at age 18), you can invest what you've saved, or continue to use that as your emergency fund, or spend it. For now, save.

Main content

Course: Financial Literacy > Unit 7

Lesson 2: Risk and return of investment options

Stocks, bonds, mutual funds, and diversification

Google Classroom

When you start thinking about investing your money, you might hear about stocks, bonds, and mutual funds. These are some of the most common investment options available to you. But what are they, and how do they work? Let's explore these three investment options and how you can use them to grow your money and achieve your financial goals.

How do I invest and make money?

Investing can be an exciting way to grow your money- it is a game of risk and return. If you've never invested before and are thinking about it, you might be wondering about the different types of investment options out there. In this article, we'll explore the most common investment options: stocks, bonds, and mutual funds. We'll explain how you can make money with each option and discuss the importance of diversification to reduce risk and increase returns.

Stocks

When you buy a stock, you're actually buying a small piece of ownership in a company. For example, if you buy a share of Plum, you become a part-owner of the Plum company. Stocks offer the potential for capital appreciation (when the value of the stock increases) and dividend income (when the company shares its profits with stockholders). However, stocks can be riskier and more volatile than other investments because they depend on the company's profitability and growth.

With stocks, you can make money in two ways: by selling them at a higher price than you bought them, and/or by receiving dividends. For example, if you bought a share of Plum at

$ 100

and later sold it for

$ 150

, you would make a

$ 50

profit.

Another way to make money with stocks is through dividends, which are payments companies make to their shareholders from their profits. Not all companies issue dividends and the amount you receive may vary. So, in addition to the

$ 50

profit from the sale, you may also receive dividend income from your Plum shares, increasing your total return on investment.

Bonds

Bonds are a type of investment where you lend your money to a government or a corporation. In return, the issuer of the bond promises to pay you fixed interest payments and repay the

at the end of the bond's term. Bonds typically offer lower risk and return compared to stocks, but they depend on the issuer's creditworthiness and interest rate changes.

You make money with bonds by receiving interest payments and getting your principal back at the end of the bond's term. For example, if you buy a

$ 1,000

bond with a

5 %

annual interest rate, you would receive

$ 50

in interest payments each year, and get your

$ 1,000

back when the bond

Mutual funds

A mutual fund is a type of investment where a lot of people pool their money together in order to buy a bunch of different stocks, bonds, or other investments. By doing this, they're able to reduce their risk because if one of the investments doesn't do well, they still have all of the other investments to fall back on. Mutual funds are managed by professionals, so you don't have to worry about picking the right stocks or bonds yourself.

You make money with mutual funds in three ways: by receiving dividends or interest from the fund's investments, by selling your shares in the fund at a higher price than you bought them, and by receiving

Diversification

If there is one phrase to perfectly describe diversification, then it is: don't put all your eggs in one basket. Diversification is a strategy to reduce risk and increase return by having a mix of different types of investments that are not highly correlated. In other words, when some investments in your portfolio are doing poorly, others might be doing well, which can help balance out your overall returns.

To diversify your portfolio, you can:

invest in a mix of stocks, bonds, and mutual funds.
choose investments from different industries and sectors.
include both domestic and international investments.

When thinking about diversifying your portfolio, you must also think about a few other things.

Risk tolerance: Figure out how much risk you're willing to accept with your investments. If you prefer less risk, you might want to allocate a larger part of your portfolio to safer assets like bonds or dividend-paying stocks. On the other hand, if you're okay with more risk, you may choose to invest more in growth-focused stocks or other high-risk opportunities.
Time horizon: Think about how long you plan to keep your investments before needing the money. If you have a longer time frame, you may be able to invest in riskier assets, as you'll have more time to recover from potential market downturns. However, if your time frame is shorter, you may want to focus on safer investments like bonds.
Financial goals: Determine what you want to accomplish with your investments, such as saving for retirement, paying for a child's education, or buying a home. Your goals will help guide your investment choices and find the right balance of risk and return in your portfolio.

Conclusion

Now that you have an understanding of the basics of stocks, bonds, and mutual funds you can start making informed decisions about your investment options. By diversifying your portfolio, you can reduce risk and increase returns, setting yourself up for a successful financial future. Always remember to do thorough research before making any investment decisions, and consider talking to a financial advisor if you're unsure about where to start. There is a good chance your bank already has one!

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x.asper
Posted 8 months ago. Direct link to x.asper's post “Just an interesting quest...”
Just an interesting question: What to do if you don't have the decrement to chose a good mutual fund, or what should I look for in a good mutual fund?
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(4 votes)
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- David Alexander
  Posted 8 months ago. Direct link to David Alexander's post “Don't choose your own. C...”
  Don't choose your own. Choose a financial advisor who works through one of the larger networks of advisors, and take your chances.
  Comment on David Alexander's post “Don't choose your own. C...”
  (5 votes)
Ethan
Posted 8 months ago. Direct link to Ethan's post “My father works for a fin...”
My father works for a financial institution, and even though his work is unrelated to the normal functions of one (such as actual investment of advising), I am not legally able to invest in stocks myself (without them). What would the next best option be?
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(4 votes)
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- David Alexander
  Posted 8 months ago. Direct link to David Alexander's post “Save. When you attain you...”
  Save. When you attain your majority (probably at age 18), you can invest what you've saved, or continue to use that as your emergency fund, or spend it. For now, save.
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  (3 votes)
zscholl1
Posted 2 months ago. Direct link to zscholl1's post “need to came out way”
need to came out way
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LOOP
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Can a person from US invest in an EU, Indian stock exchange
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- David Alexander
  Posted 13 days ago. Direct link to David Alexander's post “That depends on the rules...”
  That depends on the rules of those exchanges. Taxes on foreign investors must be paid in full, though. Ask your broker!
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soccercon12
Posted a month ago. Direct link to soccercon12's post “How do I get the best ROI...”
How do I get the best ROI based on the companies on the market?
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lydia robinson:)
Posted 5 months ago. Direct link to lydia robinson:)'s post “whats the difference betw...”
whats the difference between risk tolerance and time horizon?
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- David Alexander
  Posted 5 months ago. Direct link to David Alexander's post “As one nears the time hor...”
  As one nears the time horizon (death), one becomes less tolerant of risk, because when death is nearer, there is less time to recover financially should your money go south.
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K.B.B
Posted 22 days ago. Direct link to K.B.B's post “crypto is missing... lol”
crypto is missing... lol
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mario.mejiaescobar2146
Posted 8 days ago. Direct link to mario.mejiaescobar2146's post “need to came out way”
need to came out way
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