A brokerage is a financial company that facilitates your transactions, your buying and selling of stock; and it will manage and hold your securities, automate your reinvestments and track your tax obligations. They also offer their own products, usually in the form of Mutual Funds / Index Funds, or ETFs, (Exchange Traded Funds).
Fund types:
Think of these brokerage's fund products as baskets of various stocks, (and/or bonds etc), meant to diversify a single monetary investment by the investor. The brokerage's money managers operate the fund on behalf of the fund's investors. The fund typically has a goal or philosophy behind it which guides its operation, and this is declared in the fund's prospectus.
A fund might represent certain sectors of the economy, like healthcare or energy; a year you want to retire; or a certain type of stock, like growth or value. A fund might have no stocks at all and be just bonds, or a mix of stocks and bonds, or a blend of the 2, as well as small, mid or large caps, etc. An index fund typically attempts to track and mirror a stock exchange index, like the Dow Jones Industrial Average or the S&P 500. There are endless variations of funds to invest in.
The upside to brokerage funds is that they're more diverse than any one stock, so they mitigate the risk. This means it is a safer option than buying any one stock, especially if you are a novice and don’t follow the market daily or have academic training in it.
The downside is that these funds are products that the brokerages charge a compensation on, usually a percentage of whatever the fund earns, so that piece earned goes to them instead of you. Typically called an “expense ratio” it generally isn’t too prohibitive, especially if you use a quality low cost brokerage like Vanguard, so most of time, for non professionals, the expense ratio fees are worth it.
(See the Q n A post as to why I recommend Vanguard)
The main difference between mutual funds/index funds, and ETFs, is that you can use your brokerage to buy any other brokerage's ETFs; but you can only use your brokerage to buy your brokerage's own mutual or index funds, (which also means you can't buy other brokerage's mutual or index funds). Also, mutual and index funds usually get the close of trading day's price, while an ETF gets the price at the moment the transaction is made, just like a normal stock would.
Be aware that an ETF, can have a higher expense ratio than a comparable index / mutual fund. That slightly higher expense is why brokerages offer what is essentially their own mutual funds, to other brokerages (via the ETF). The higher expense also allows for the customer to trade the ETF like a stock, instead of relying on the close of day prices.
Finally, U.S. markets typically close at 4pm Eastern time, but brokerages won't reveal their funds new value per share until after 6pm. That's the price used for any mutual or index fund bought or sold that day, (so i typically don't trade in it til closer to 4pm, so i can see ~where the market is likely going to close).
Stocks, bonds, and mutual funds, oh my!:
So how do you know what to invest in? My recommendation to new investors is to start with diverse mutual (or index) funds. The more you invest, the more fund choices the brokerage will give you. As you gain experience, you can also try your hand at individual stocks and bonds.
You need to gauge your investment time horizon, your risk tolerance, your emphasis for dividends and income and reinvestment vs growth, and your level of interest in researching and maintaining your investment choices.
Summary:
Investing in public companies has many choices. It may seem overwhelming, but the best thing to do is get started! You will get the hang of it, you don't need to be a genius or have training to do this. Feel free to ask the brokerage for help and advice!
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