When it is time to invest it is essential not to put all your eggs in the same basket. If you do, you risk the risk of massive losses in the event that a single investment performs poorly. Diversifying across different asset classes, such as stocks (representing individual shares in companies), bonds or cash is a better option. This reduces investment returns as well as allowing you to benefit from higher long term growth.
There are a number of types of funds, including mutual funds, exchange-traded funds and unit trusts (also known as open-ended investment companies or OEICs). They pool funds from a variety of investors to purchase stocks, bonds as well as other assets, and then share in the gains or losses.
Each type of fund has its own characteristics and comes with its own risks. For example, a money market fund invests in short-term investment that are issued by federal, state and local governments or U.S. corporations and typically is low-risk. Bond funds generally have lower yields, but they have historically been more stable than stocks and offer steady income. Growth funds seek out stocks that don’t pay dividends, but have the potential of increasing in value and generating above-average financial gains. Index funds are based on a particular index of stocks, such as the Standard and Poor’s 500. Sector funds focus on a particular industry segment.
It is important to know the different types of investments and their terms, whether you choose to invest via an online broker, roboadvisor or another service. Cost is a major factor, as fees and charges will take away from the investment’s return. The best online brokers and robo-advisors provide transparency about their charges and minimums, as well as providing educational tools to assist you in making informed choices.
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