7. What’s the difference between stocks and funds?
Funds are baskets of investments, giving them an edge over individual stocks because you’re investing in possibly hundreds of companies in one fell swoop.
ETFs—or exchange-traded funds—are traded on an exchange, so, like stocks, you can buy and sell shares at various prices throughout the trading day. Mutual funds, on the other hand, are bought and sold once the market closes each day. ETFs tend to be cheaper, with “expense ratios” as low as .03 percent—mainly because they’re often designed to simply track an index rather than be actively managed.
8. What’s an expense ratio?
It’s how much you pay to invest in a fund, and it’s expressed as a percentage of your assets. For example, if the expense ratio is 1 percent and you invest $1,000, your fee is $10.
It’s generally taken out of the fund’s returns, so you may not even realize you paid a fee. But it can add up. After all, you’re not just giving up the money today—you’re missing the compound growth that money could generate. Look for expense ratios under 1 percent for actively managed mutual funds and 0.5 percent for ETFs.
9. What’s the difference between stocks and bonds?
When you buy a stock, you become a part owner of the company. When you buy a company’s bond, you become a lender. (You can also own government-issued bonds.) In both cases, you’re rooting for the company to do well, but with the former, the firm’s success could translate to a bigger payday for you. Its failure is your loss, too, though. Bonds are generally considered less risky investments since you get paid back with interest either way—unless the company goes under. So look at a bond’s rating before buying to see how risky it is. On Standard & Poor’s scale, “AAA” and “AA” indicate high quality investment grade.
10. How much should I invest?
Everyone has different financial goals, so how much you need to achieve them depends on your unique situation. Still, rules of thumb can be handy, and one is that you should aim to save or invest 20 percent of your annual income. Regardless of how much you can put away today, the most important thing is to just start. For one, you’ll get in the habit, which makes it easier to invest more as your paycheck increases. And you’ll give your money time to grow.
April 25, 2018
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