Diversification is the process of dividing your money over a variety of investments that will perform differently in the same situation. Bonds, for example, usually rise when stock prices fall. You can lessen the volatility of your portfolio by holding both stocks and bonds.
When interest rates rise, bond prices often decline, much like a seesaw (and vice versa). This is due to the fact that investors aren't as eager to pay as much for old bonds with lower interest rates as they are for new bonds with greater interest rates.
You run the danger of losing all you invested, if not much more, when you buy stocks on margin. In the above example, a stock transaction costing $1,000 was made by an investor using $500 of his own money and $500 borrowed from a brokerage company. The investor still owed the brokerage company for the margin loan when the stock was sold after losing 50% of its value. The stock's remaining value was $500.
Long-term, the stock and bond markets frequently reward taking risks. The risk-reward tradeoff is what we refer to as. High-risk investments like small-company stocks, however, can be very volatile in the near run. You may want to place more emphasis on investments that offer a consistent return with less volatility, such short-term bonds, the less ready you are to take that risk.
The reason why shares of stock are referred to as "equities" is because they each represent a small portion of a company's ownership and often give the holder the right to cast a vote in the election of directors as well as other issues at shareholder meetings or by proxy.
You own a share of a mutual fund that invests in Apple and Google; you don't actually own Apple and Google (unless you buy them yourself elsewhere). Unfortunately, you'll have to pay for your own ice cream cone as well. If you're investing, on the other hand, you've earned it.
Short selling is borrowing stock from a broker via a margin account, selling it, and then buying it again and giving it back to the broker. Since the value of the stock borrowed and sold would be higher than the value of the shares subsequently purchased and returned to the broker, the investor will profit if the stock declines in value, as the short seller anticipates. To make up for the stock due to the broker, the investor must pay the difference if the stock's value increases.
Bonds are loans made by investors to businesses or governmental entities in exchange for periodical interest payments and the eventual return of the principal. To raise funds for operations, acquisitions, and capital investments, businesses issue corporate bonds. Bondholders, however, do not have ownership rights in the company like stocks do.
You won't be able to deduct money deposited into a Roth today, but you will be able to withdraw it tax-free later. This implies that your Roth earnings are never taxed (as long as you follow the IRS's withdrawal criteria). Traditional and Roth IRAs and 401(k)s are both available.
A basis point is a unit of measurement for interest rate adjustments. One basis point equals 0.01 percent (0.0001), therefore if rates jumped 50 basis points, that means they rose 0.5 percent
You aren't genuinely diversified if you own 20 different stocks, all of which are in the IT business. If the tech industry suffers a setback, your entire portfolio will be wiped out.
ETFs, like stocks, can be purchased and traded at any time during the day. This means that an ETF's price will fluctuate from time to time. A mutual fund, on the other hand, is only priced once a day, at the end of the trading day. Active or passive management is available for both ETFs and manual funds.
Shareholders of common stock have the last claim among those with claims to the assets of a bankrupt corporation, coming after secured creditors, bondholders, and holders of preference shares. If the claims of the secured and unsecured creditors are not fully satisfied, common shareholders may not receive anything.
Even though municipal bonds have lower yields than other government bonds, investors in higher tax brackets are drawn to them because municipal bond dividend payments are often free from federal income tax.
Shorting a stock, often known as short selling, is the act of selling borrowed stock. Short sellers do this in the hopes that the stock price will fall, allowing them to purchase it at a reduced price later. If the price rises, the seller is liable for purchasing at the new price, effectively doubling the risk of loss.
A commission paid to the broker who sells you a mutual fund is known as a "sales load." On top of the expense ratio, the sales load is deducted from your investment dollars, which is why investors should look for no-load mutual funds.
