It’s important to not put all your eggs into one basket when it is time to invest. By doing this, you expose yourself to the potential for significant losses should one investment perform poorly. Diversifying across different asset classes, such as stocks (representing the individual shares of companies), bonds or cash is a better option. This helps to reduce investment returns volatility and may allow you to reap the benefits of higher long-term growth.
There are many types of funds, including mutual funds exchange-traded funds, unit trusts (also called open-ended investment companies or OEICs). They pool funds from several investors to buy stocks, bonds, and other assets. Profits and losses are shared by all.
Each type of fund has its own characteristics and risks. For instance, a money market fund invests in investments for short-term duration offered by federal, state and local governments or U.S. corporations. It typically has a low risk. Bond funds have historically had lower yields, but they are less volatile and provide steady income. Growth funds seek out stocks that don’t pay dividends but are capable of increasing in value and generating higher than average financial gains. Index funds track a particular market index, such as the Standard and Poor’s 500, sector funds are focused on particular industries.
It’s important to understand the different types of investment options and their terms, regardless of whether you choose to invest with an online broker, roboadvisor, or another service. The most important factor is cost, since charges and fees can cut into your investment return over time. The top online brokers, robo-advisors, and educational tools will be transparent about their minimums and fees.
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