Types of Investment. What You Should Know About Investment
This is the first of a series on types of investing. In this post, we will discuss what are called passive and active investments. We will also look at some examples of each kind of investment to help you understand them better.
Passive Investments: Passive means that an investor does not control how their money is invested. The only thing they can do with it is to watch it grow or lose value. This includes stocks, bonds, mutual funds, ETFs, etc. These are known as "passive" because there is no human intervention in managing your portfolio. You just sit back and let someone else manage it for you.
Active Investment: An active investment involves actively choosing which securities to buy and sell based on market conditions. For example, if you want to invest in Apple stock, you would need to decide whether to purchase shares now or wait until after earnings reports come out later in the year. If you choose to hold onto your shares during those months when Apple has its quarterly results coming out, then you could make more than $1 million by selling before earnings report day comes around. However, if you don't know about these upcoming events, you may miss out on making millions of dollars from buying early.
Active investors must be aware of all current information regarding companies so that they can make informed decisions. They must constantly monitor the markets and react quickly to changes to maximize profits.
Examples of Passively Managed Portfolios: A passively managed portfolio is where the manager buys and sells assets without regard to specific company performance. It's like having a financial advisor who doesn't care much about individual clients' needs but instead focuses solely on maximizing returns across many different portfolios. Examples include index fund managers such as Vanguard and Fidelity.
Example 1: Let's say I am interested in purchasing 100 shares of Google stock. My broker tells me that he thinks GOOGLE is undervalued right now and recommends that I buy ten shares today. He says that my risk tolerance level is low enough to take advantage of his expertise and allow him to handle everything for me. So, I go ahead and place my trade through him. After researching online, I found out that Google had recently announced plans to acquire Motorola Mobility Holdings Inc., a mobile phone manufacturer. Since I'm already planning to own shares of Google anyway, I decided to add another five shares to my position. Now, I've got 105 shares of Google in my account.
Example 2: Let's say I'm looking into opening up a Roth IRA. I see that Vanguard offers several options, including both traditional and target-date retirement accounts.
In addition, I notice that some people seem to prefer investing in bond funds rather than equity funds. Based on this information, I decided to open up a Traditional IRA and put 50% of my contributions towards equities and 50% towards fixed-income investments. Once again, I use my broker to execute my trades. As time goes on, I realize that I'd like to increase my allocation to equities even further. But since I have no idea how much money I'll eventually withdraw from my account, it seems prudent to keep things conservative at first. Therefore, I only raise my allocation to 60%. This way, I won't lose too much sleep over what will happen once I withdraw money from my account.
Passive management means that an investor does not directly control their asset allocations; instead, they rely on professional advisors to do the heavy lifting. The goal here is to minimize costs while still achieving high levels of return.
Passive Management vs. Active Management
The main difference between passive and active management lies with the amount of work required to manage each type of strategy. With active management, there are constant adjustments made throughout the trading process. These adjustments involve monitoring prices, analyzing charts, researching news stories, etc. All of these activities require significant amounts of effort and time. On top of all of this, you also need to make decisions quickly based on your analysis. If you're not sure whether or not something makes sense, then you may end up making poor investment choices.
With passive management, however, investors can rest easy knowing that someone else has done most of the hard work for them. They don't have to worry about constantly adjusting their positions because professionals handle those tasks. Instead, they focus solely on enjoying life without having to think about day-to-day market fluctuations.
Why Should You Use A Broker?
There are many reasons why using a brokerage firm might benefit you as an individual investor. First off, brokers typically offer lower fees than other types of financial institutions. For example, if you invest $10,000 per year, you could pay anywhere from 0.25%-0.50% annually. However, when you compare this rate against the average annual fee charged by banks, you begin to understand just how big of savings you stand to reap. Banks charge around 1.5%-2.0%, which is more than double!
Another reason why you should consider working with a broker is that they often provide additional services such as tax advice, portfolio tracking software, educational materials, research reports, etc. While these features aren’t necessary for every person who invests, they indeed come in handy for anyone who wants to get ahead financially.
Finally, brokers tend to give you access to better products. Most large firms operate under one umbrella called “brokerage houses.” Within these companies, you’ll find different divisions specializing in various areas, including mutual fund offerings, stocks, bonds, ETFs, options, futures, forex, commodities, real estate, private placements, etc. By choosing a specific division within a company, you gain access to a wide variety of securities.
This allows you to diversify your investments so that even if one area goes down, it won’t affect everything else.
What Are Some Types Of Investment Options Available To Me As An Individual Investor?
As mentioned earlier, investing involves two major components: assets and strategies. To determine what kind of approach will best suit your needs, we must first look at both sides of the equation. The following sections discuss some of the most popular asset classes available today.
Stocks & Bonds
These two categories represent the majority of traditional forms of investment. Stocks refer to shares of publicly traded corporations, while bonds are debt instruments issued by governments, municipalities, businesses, non-profit organizations, etc. Both of these asset classes allow individuals to participate in the growth of capital markets through ownership interests.
This category represents another common form of investment. Mutual funds are pooled groups of money managed by professional managers.
These people use sophisticated mathematical models to help pick winning stock picks. Once again, owning a share of a mutual fund gives you exposure to the overall performance of the entire group.
This type of investment refers to buying or renting property. It includes things like single-family homes, apartments, commercial buildings, vacant land, etc. Real estate can be purchased outright or financed via mortgages. Either way, there are pros and cons associated with each option. If you decide to buy something yourself, then you have complete control over its management. On the flip side, financing costs may eat away at any profits you make on the deal.
While not technically considered an asset class, precious metals do fall into the same general category. They include gold, silver, platinum, palladium, rhodium, iridium, etc. Special metal prices fluctuate based upon supply and demand. When investors see rising inflation rates, they begin hoarding their savings which causes shortages. Conversely, when inflation levels drop, more people want to invest in this asset class because they believe it has value.
While alternative investments don't fit neatly into any other category, they're still worth mentioning. Alternative investments include hedge funds, venture capital, private equity, etc. Hedge funds are similar to mutual funds but focus exclusively on trading financial derivatives such as currencies, interest rates, credit default swaps, commodity contracts, etc. Venture capitalists provide funding for start-up technology companies. Private equity is used to buy out failing companies and turn them around. All three types of alternatives require specialized knowledge and expertise.
Investment decisions should always involve careful consideration of risk versus reward. While stocks and bonds offer excellent potential returns, they also carry high risks. For example, if the market crashes tomorrow, you could lose everything that's invested in those securities. Alternatives tend to be less risky than conventional options but come with higher fees. You'll need to weigh all factors before making a final decision about how much to allocate towards different asset classes.