Understanding how Mutual Funds and ETFs work
Exchange-traded funds and Mutual Funds are two different types of investment securities with the same structure and they function in almost the same way
Exchange-traded funds and Mutual Funds are two different types of investment securities with the same structure and they function in almost the same way. They are both diversified investments, permitting investors to get access to several stocks, bonds or both, and all with one fund.
The major difference between both funds is in how they trade and their diverse costs. While mutual funds are purchased and put on sale at net asset value (NAV), ETFs are handled like stocks. This means that they are bought and sold at a specific market price.
Mutual Funds
Mutual funds can be defined as pool investments which give the fund managers the permission to buy several securities, such as bonds or stocks collectively. Mutual funds mostly hold stocks in dozens and hundreds in just one fund.
Mutual funds are not only easy to understand, but they are also readily available for investors to purchase from various mutual funds companies, online discount brokers, retirement accounts, and brokerage firms.
While each mutual fund is different from the other as they tend to have their various objectives, they are typically diversified. In other words, investors have access to several securities or classes of investments in one fund towards reducing stock volatility.
Investors who do not want to passively invest can always employ active management to professionally manage and even potentially outperform an index at a low cost.
Exchange-traded Funds (ETFs)
ETFs refer to investment securities sharing several features with index mutual funds, such as passively tracking an index. They trade the same way stocks do, and it is important that an investor is aware of their benefits and disadvantages before investing.
Unlike mutual funds, ETFs are known for their low costs. This is possible because there’s no need for research or analysis like actively-managed mutual funds require; they just work in line with an index.
They are also diversified investments because they provide investors exposure to dozens and hundreds of stocks and bonds all in one fund.
ETFs allow trading flexibility as well. Since they trade like stocks, investors can buy or sell them during the day and also place market orders in order to sell them out at certain points, intentionally avoiding losses.
Investors might need to may commission on ETFs, since they are traded just like stocks.
Mutual Funds and ETFs are funds which can be effectively used by any investor. While long-term investors usually make use of mutual funds, short-term investors make use of ETFs.
In the end, it depends on the investor’s ability to maximally utilize them, and knowing what’s best in attaining his or her investment objectives.
Written by Lawretta Egba.
What is a Security?
A security is an asset which holds a form of monetary value, usually representing a position of ownership in a publicly traded corporation.
A security is an asset which holds a form of monetary value, usually representing a position of ownership in a publicly traded corporation. It is a financial instrument easily interchangeable with another asset of the same type.
Securities could represent ownership through various means such as stock, or a creditor relationship with a corporation or governmental body.
There are three major types of securities and they are: hybrids, debt, and equity.
Hybrid Securities
These are securities which are a merge of both debt securities and equity securities, combining features from debt and equity securities, and some examples of hybrid securities are equity warrants, preference shares, and convertible bonds.
Equity warrants refer to options issued by companies to give shareholders rights to buy stocks within a particular period of time and at a particular amount. Finally, convertible bonds are bonds which are easily convertible into shares of common stock in a particular issuing company.
Debt Securities
Debt securities have to do with borrowed money, with specific terms outlining the loan size, interest rate, and maturity or date of renewal. Debt securities involve borrowed money that must always be repaid.
Examples of debt securities include corporate and government bonds, collateral securities, and certificates of deposits. Holders of these debt securities are usually entitled to repayment of principal, regular payment of interest, as well as any other stated contractual rights.
Debt securities are usually for a fixed term, and after this fixed term, they could either be redeemed or not. They could also be secured, which means that they’re backed by collateral.
Equity Securities
These are usually seen as the preferred security. They represent ownership interest which shareholders possess in a company, trust, or partnership. Equity securities are realized in the form of shares of capital stock, including shares of both preferred and common stock.
Typically, holders of equity securities are not entitled to receiving regular payments. Despite the fact that equity securities usually pay out dividends, these holders of equity securities are only able to profit from capital gains which involve them selling the securities when they increase in value.
Equity securities entitle their holders to a form of control of the company’s affairs through voting rights, and in the case of bankruptcy, holders of equity securities only share in residual interest after creditors have received all their obligations. These securities are sometimes offered to holders as payment in kind.
To invest in securities, the issuer first creates the securities for sale, before the investors can buy them. They provide a means for companies, organizations, and other types of commercial enterprises to raise capital.
Written by Lawretta Egba.