Investment vehicles

What exactly is an investment vehicle, you ask?

Sorry, that was misleading. It's not a car. An investment vehicle is any product used by investors to invest.

I'll summarize the most popular vehicles here.

1) STOCKS

Stocks are pieces of a company that you can purchase once a company "goes public". Each share (piece of stock) has some price. You can look at the company's history and decide if you want to invest, and if so, how many shares.

For example, in June 2020, one share of Microsoft stock costs $187.20. So, if you have a thousand dollars and want to invest it in Microsoft, you could buy 5 shares.

Here is what Microsoft's stock has looked like over the last day...

the last year...

and the last 35 years.

It seems like the value will keep increasing, but no one knows. Ideally, you would buy the stock when the value is low (like 2010 here) and sell when it's high (like right now?) but no one can really predict what the market will do next. What if you keep the stock for another month and there's a recession even worse than the one in March, and it turns out Microsoft's laptops electrocute users, and their CEO doesn't wear a mask in the grocery store? You'll probably lose most of your $1000. That's why buying individual stocks is kind of like gambling. The risk is pretty high because the future of one single company can never be known.

Note that stocks are categorized by the value of their company. In order from least to most money, they are called small-cap (< $3 billion), mid-cap ($3-6 billion), large-cap (> $6 billion), or blue-chip (Apple, Amazon, Microsoft, etc).

2) BONDS

A bond is a loan given to a company or government with the expectation they will pay the money back at some particular date, with interest. Bonds are usually sold in multiples of $1000. They can be short-term (< 5 years), intermediate-term (5-10 years), or long-term (> 10 years) loans and this length of time is called the bond maturity.

The riskier the investment, the more interest you can stand to make. "Riskier" usually either means longer maturity or a riskier company. For example, a desperate company that is about to go bankrupt may offer bonds with crazy-high interest rates.

Generally, a bond is a fairly low-risk investment, as long as the company you invest in doesn't go under. Unlike stocks, you know exactly how much money you will make and when. Treasury and government bonds are known for being especially safe.

Because bonds are safer than stocks, they also tend to make you less money. According to CNN, bonds have returned an average yield of 5-6% per year since 1926, while stocks have returned an average of 10% per year.

3) MUTUAL FUNDS

A mutual fund is an investment company that uses investors' money to invest in some combination of stocks and bonds. Just like stocks, you can buy a number of shares that own parts of many different companies. Unlike stocks, you can't trade them throughout the day. Mutual funds are priced, bought, and sold once a day after the market closes.

Mutual funds are especially handy because you don't have to worry about picking individual stocks or bonds. If one company has a bad year or goes bankrupt, you won't lose much money because you are diversifying (spreading out) your investments. In addition, the fund manager picks the stocks and bonds, so you don't get a say in where your money goes (beyond choosing the mutual fund).

You can easily pick a mutual fund by looking for one that matches your goals, such as aggressive growth or reliable income. You can also look at the cost of the mutual fund (typically 0.25% to 2.5%), and review the fund's history (available in a document called the "prospectus").

Note: A money market fund is a special type of mutual fund that only invests in short-term bonds.

4) ETFs (Exchange-Traded Funds)

ETFs are very similar to mutual funds. They are made up of a group of stocks and/or bonds, but they trade like stocks throughout the day. Again, the portfolio is chosen by the fund manager. ETFs are often taxed less than mutual funds, and generally have lower fees.

Like stocks, you will also owe a commission to the brokerage (like Fidelity) every time you buy shares.

To choose an ETF, you should look for one that invests where you want it to: big company stocks, small stocks, dividend stocks, long-term or short-term government or corporate bonds... or maybe some combination of all of the above.

ETFs and mutual funds are great investments for a beginner because they spread your money across many different industries and companies. It is unlikely that they will all collapse at the same time (except for recessions, when you'll just have to wait it out).

5) REAL ESTATE

Yep, sure enough, buying a house or some land or an apartment building is an investment!

I won't go into that much here, because it's not something you can easily try out today with a brokerage account. Everyone seems to have strong ideas about whether real estate is a worthwhile investment and whether it's the good or bad kind of debt. I have no idea what my own real estate plan is, so I won't try to advise yours.

6) COMMODITIES

Ooh la la! Commodities are raw materials that are needed to create products. For example, some common commodities include oil, gold, coffee, and lumber. The worth of a commodity is determined by supply and demand. Price increases when supply is low or demand is high. Gold is the only commodity that you might choose to invest in physically, by owning gold bars, jewelry, coins, and more. Otherwise, you can choose to invest in any of these commodities through mutual funds or ETFs.

I hope you learned something today about your options! What do you choose to invest in?