Investing: The Basics

What can I invest in?

Investment opportunities include but are not limited to the following:

1. Stocks 

2. Index Funds (ETFs, Mutual Funds) 

3. Bonds 

4. Options

5. Certificate of Deposit (covered in the banking section)

6. Money Market Fund (covered in the banking section)

7. Marketable Commodities (artwork, collectibles, precious metals, etc.)

8. Real Estate (rentals, REITs, syndications, house flipping, etc.)

9. Cryptocurrency 

10. Small Businesses

11. Real estate funds, debt funds, syndications (accessible to accredited investors only)

12. Venture capital, private equity funds (accessible to qualified purchasers only)
    
    I recommend ETFs for most investors and cover it in more detail below.

What is a stock?

A stock is a piece of ownership in a publicly traded company. A publicly traded company is any company that is listed on the stock market exchange where investors can purchase pieces of company ownership. If you purchase stock, you are acquiring partial ownership (i.e. “equity) in the company. The word “share” represents the same thing as “stock”. So, if someone has 10 stocks of company A, it means they own 10 shares of company A.

What is a bond? 

A bond is an agreement between you and the borrower. The borrower (typically a government or company) will give out bonds in exchange for money from investors (e.g. you) as a way to raise money. The agreement is that investors will loan money to the borrower for a certain period. After the loan term ends (i.e. “matures”), the investor will receive the entire invested amount back (i.e. the “principal”) plus interest. 

In other words, a bond is sort of like an “I owe you”. For example, if I want to buy an apartment complex but don’t have the cash to purchase it, I can raise money from investors and give them a paper (I’ll call the paper a “bond”) that states, “if you loan me money for 6 months, then I’ll give you your money back plus 5 percent interest once the 6 month period ends.” 

Bonds can be considered low or high-risk investments depending on who is issuing the bonds. Generally, U.S. government bonds are considered low-risk investments because they are backed by the full faith of the U.S. government. Bonds issued by other companies can vary in terms of risk. If a company has a lot of debt and is at risk of going bankrupt, then investors risk losing their principal and may also not receive any interest payments.

What is a ticker symbol?

A ticker symbol is like a special code for companies in the stock market. It's an alphabetized code, usually made up of one to five letters. Most companies have three to four letters in their ticker symbol, while mutual funds have five letters and end with "X".

If you're looking up a company's ticker symbol online, just put a "$" before the ticker symbol.

Which investment style is recommended?

Listed below are some common investment styles. Many successful investors recommend the bolded options below. 

1. Index investing (ETFs or mutual funds)

2. Value investing—popularized by Warren Buffet

3. Growth investing 

4. Market Capitalization investing (small vs. large cap)

5. Speculative investing—absolutely NOT recommended.

What is an index fund? 

An index fund is a collection of stocks and bonds created by a financial institution. The goal of the index fund is to mimic the composition and performance of another financial market index.

Some examples of popular financial market indexes are the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite. The S&P 500 index consists of 500 top-performing U.S. companies within the stock market.

With this understanding, an index fund is a way to invest in a bunch of stocks or bonds that follow a particular group or type of investment. It's like buying a piece of the entire stock market or a specific group of stocks without choosing each stock individually. There are two types of index funds: exchange-traded funds (“ETFs”) and mutual funds. I discuss the differences below.

Two Types of Index Funds: ETFs vs. Mutual Funds

1. Exchange-traded fund (ETF)

1. ETF stock exchange ticker symbols are typically represented by 3-4 letters (e.g. VOO, VTI, VYM).

2. Usually passively managed, therefore they generally have lower fees (i.e. lower expense ratios) than mutual funds

3. Average ETF expense ratio: 0.06%

4. Can be purchased on the stock exchange as shares of ETFs, similar to shares of stocks. Therefore, ETFs do not require a minimum dollar investment amount.

5. Typically generate fewer capital gains taxes than mutual funds.

2. Mutual fund 

1. Mutual fund stock exchange ticker symbols generally end in “X” (e.g. VTSAX, VTIAX, VBTLX).

2. Usually actively managed (therefore may come with higher management fees than ETFs).

3. Average mutual fund expense ratio: 0.68%

4. Mutual fund orders are placed once a day and you receive the same price as everyone else on the same day.

5. Invested by dollar amount and typically requires a minimum dollar investment amount to participate in a mutual fund (e.g. $1500 initial investment amount). Therefore, you can purchase fractional shares or a certain dollar amount worth of shares.

6. Usually involves high-frequency trades and, therefore can be more difficult to track from a tax standpoint (short-term vs. long-term capital gains) than ETFs.

7. Mutual funds include Target Date Retirement Funds. These funds experience fund rebalancing or readjustments of the assets within the fund to reflect adequate risk based on the target retirement date of the fund.

Should I Invest in ETFs or Mutual Funds?

If you are a simple investor, investing in ETFs (a type of index fund) is recommended.

You do not need to invest your money in multiple ETFs tracking the same index because each ETF is already well-diversified.

Recommended ETFs:

• VOO (Vanguard 500 Index Fund ETF)

• VTI (Vanguard Total Stock Market Index Fund ETF)

I like VOO and VTI for their low expense ratios (i.e. asset management fee). You may see other recommended ETFs that perform similarly such as SPY or SPLG; however, their expense ratio is higher. I prefer VOO over VTI as it has historically performed better than VTI. But, if you still want more diversification by participating in all publically traded stocks in the stock exchange, then VTI works as well.

TLDR: Choose one ETF—either pick VOO or VTI.