Mutual Funds, ETFs and CEFs.

There are a lot of different ways to invest your money. Buying individual stocks is one of the most well-known, but probably isn’t the best for most people. In fact it can be downright scary when you’re just starting out. That’s because when you’re first starting out you may only be able to buy one stock. Then your entire portfolio is tied to this one stock. If the company has a rough time and the stock goes down you could lose a lot of money. At least in the short run. That’s why I usually recommend that new investors don’t start with only one stock. Instead, start with a few hundred.

How do you start with a few hundred stocks when you can only afford to buy one? With an investment that includes a lot of stocks. Mutual funds, Exchange Traded Funds and Closed End Funds are three examples. Each of these can be bought and sold by new investors at most brokerage firms. They each include many different stocks. So what are they and how do you use them?

Mutual Fund.

Mutual funds are one of the best places to start for new investors. A mutual fund pulls money from a lot of different investors. The fund manager then uses that money to buy different stocks based on the fund’s goal. There are mutual funds that focus on S&P 500 stocks, utility stocks, medical stocks, and pretty much any other type of stock. There are also mutual funds the focus on investing in real estate, bonds and even insurance.

To buy into a mutual fund you invest whatever amount you want. Most funds have a minimum amount to start. The money is then pulled with other peoples’ money to buy the stocks. You can buy in at any time, and when you want your money back you sell the fund. When you buy in you buy based on the amount of money that you want to invest. Not based on the current share price. Most funds have a minimum of 2500-3000 dollars. Some funds though can have minimums upwards of 100,000 dollars or more.

Fees vary from fund to fund. With some you have to pay a fee to get in, some collect a fee when you sell and most collect an annual fee. The annual fee is collected out of the fund itself, so you don’t really see it. It will be reflected in the growth of the fund though.

Exchange Traded Fund (ETF).

Exchange traded funds are similar to mutual funds except that you buy them like a stock. So instead of investing a certain amount of money you buy the number of shares that you want. This can be a good place to start when you’re first starting to invest since you can buy as few or as many shares as you want. That may be less expensive than reaching the minimum to buy into a mutual fund.

Otherwise ETFs work the same as a mutual fund. They own stock in many companies so they help diversify your investments. ETFs generally follow an index like the S&P 500, so fees are low, and the price can be more predictable.

Closed End Fund (CEF).

Closed end funds are kind of a cross between ETFs, mutual funds and regular stocks. There are two ways to invest in them. You can invest when they are created or buy the shares after market. For today we’re only going to look at investing in them after they are created. When a CEF is created they pull together the investors’ money and use that to buy stock. The company is incorporated and they issue shares like a regular company. So it’s kind of like a company that just owns stock. Then they sell the shares just like any company. You can then buy and sell the shares just like any stock. The company isn’t involved with people buying and selling its shares. It only maintains its investments. Unlike mutual funds it doesn’t take in any new money. You buy shares from someone who already owns some. Just like a stock the value of the CEF goes up and down.

The advantage of a CEF over a mutual fund is that a mutual fund has to deal with money coming in from investors and money going out that investors want. CEFs don’t have new money coming in and they don’t have to pay out money to investors that want to withdraw money. Because of this they don’t have to maintain cash incase an investor wants to withdraw some money. They also don’t have to incur additional expenses to buy new shares when new money is invest, or sell shares when money is withdrawn. CEFs do have maintenance expenses just like mutual funds and ETFs, and like those it’s pulled directly from the CEF, so you only see them in the fund’s performance. Beyond expenses, another difference between CEFs and mutual funds is that since the share price of a CEF goes up and down like any stock, sometimes it is actually lower than the value of the stocks that it owns. Buying at this time can be like buying the stocks it owns on discount.

There are a lot of ways to begin investing. Before you start any investing, though, be sure to read the prospectus. Do your due diligence. Make sure that the investment is sound. Starting with options like the three in this article can be a great way to diversify your money. That will help your money stay safer and more stable through market ups and downs.

 

Have you used any of these three? What was your experience? What would you recommend to new people that are just starting out?

Leave a Reply

Your email address will not be published. Required fields are marked *