FIN 340 - Journal 1-2: Mutual Funds and EFTs
Short-term investments have a life of about 1 year or less and they generally carry little to no risk. This type of investment is popular amongst investors who do not want to invest their funds into riskier portfolios such as stocks and bonds. Short-term investments provide liquidity because you can easily convert them into cash with little to no loss of value. Some examples of short-term investment are money market mutual funds and United States treasury bills. Yet, there are some risks that come along with short-term investments. If taxes and inflation rise this can cause a reduction on the return you earned when you made the investment. Short-term investments "involves a certain level of expertise and time, as investors must closely monitor price movements and identify purchase and/or sale spots" (CFI, 2022).
A stock is "also known as equity, is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits to how much stock they own" (Hayes, 2021). Examples of stocks are preferred stocks and common stocks. With a preferred stock you are given priority of common stocks holders when it comes to dividend pay outs. But with a preferred stock when interest rates rise the value of the stock goes down and vice versa. Common stocks are the most popular way people invest their money. A common stock provides the most potential when it comes to long-term gains or capital gains. But capital gains are not always guaranteed. Stock prices change all the time and sometimes for no reason at all, so there is always a chance that you could lose money. There is also no guarantee that the company you invested in will pay dividends or even stay in business.
Fixed income investments, bonds, are "investments that offer a periodic cash payment
that may be fixed in dollar terms or may vary according to predetermined formula. Fixed-income securities tend to be popular during periods of high interest rates when investors seek to "lock in" high returns" (Gitman, Joehnk, Smart, 2017). A bond is a long-term investment that is issued by a corporation or by the government. A risk with investing in bonds is that they vary in terms of liquidity and that could make them easy or not easy in terms of selling them before the maturity date. If you were to invest in a corporate bond, it could be a riskier investment as they are not backed by the government and because of that they tend to offer higher returns.
Mutual funds are managed by investment companies and investors can buy shares in the fund. Mutual funds allow investors to create a well-diversified portfolio. A downfall to a mutual fund is that the investor must pay fees to the investment company, and it is a percentage of the assets invested. With a mutual fund you are not able to