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The stock market has long been notorious for making and breaking fortunes. The central hub of the modern economy, its roots go back centuries, to the trade of stock certificates in enterprises such as the British East India Company (and potentially further back still, in less recognizable form). Today, the stock market forms the backbone of personal fortunes, as well as being heavily invested in by businesses and governments. The stock market is an interconnected network of individual national markets, which also operates on a global level of buying, selling and trading; there’s a lot involved for any financial advisor to keep track of.
Here are 5 of the most important things that every financial advisor needs to bear in mind with regard to stocks and bonds.
There’s a Lot of Variety in Bonds
Bonds come in a range of types, with four common divisions being government, municipal, corporate and junk bonds. In the American market, government bonds are those issued by the government at the federal level. They are the safest and most reliable bonds, which generally leads to low interest rates (less risk, less reward). Government bonds are frequently bought, in large quantity, by large organizations making long-term investments. Municipal bonds are one step down from government bonds; they represent a piece of an individual state or municipality. While considered slightly less reliable than their federal cousins, municipal bonds often feature tax-free interest as an incentive. Purchasing corporate bonds features greater risk, as well as potentially greater reward, but here the individual reliability of the corporation comes into play. Junk bonds are (normally, but not always) corporate bonds that are widely considered to be too risky to be worth substantial investment, despite potentially large payouts.
Focus on Stocks with Dividends
Dividends are monetary payments made against the increase in a stock’s value every quarter. In addition to representing direct financial gain, particularly if large amounts of the stock are owned by a single party, dividends also protect against a potential drop in value. A stock might lose 8% of its value on paper over the course of a year, but — depending upon how that loss paid out — its investors might see only a 1-2% short-term loss, thanks to dividends.
There is More than One Interest Rate
A bond has what is known as a coupon rate, which is the percentage interest paid out annually based upon its face value (face value is usually referred to as “par”). However, a professional financial advisor also needs to keep a bond’s current yield in mind. The current yield is also expressed as a percentage value, and is widely misunderstood — even by professionals. It is calculated based on the objective dollar amount represented by the coupon rate, and it compares that to the value at which the bond is presently being traded — so, if a bond’s current yield is higher than its coupon rate, that means the bond is being traded for less than its face value.
There are Different Types of Investing
Both stocks and bonds can be traded directly, or be bought and sold through mutual funds. A mutual fund represents group ownership in a stock or a bond, much as the individual stock or bond represents part ownership in a larger enterprise. Both traditional and mutual fund investing have their advantages, as well as their disadvantages. Traditional investing, for example, allows a bond to be held until it matures, a period of time after which its face value and original interest rate are guaranteed. A mutual fund offers no such option; its success is based on the decisions of the fund manager, but it offers part ownership of a large and diversified investment pool.
Buy Low, and Sell High
The core essential advice relating to investment in the stock market hasn’t changed in hundreds of years, but the full import of this deceptively simple statement is often missed — even by professionals. While many people have an easy enough time focusing on a combination of low value and forecasts of reliability, investors are prone to short-changing themselves in the long term. They will let go of a stock too soon, after it has demonstrated consistent gains; more commonly still, they hold on to a stock for too long, failing to recognize changing forecasts and current opportunities.
By advising their clients responsibly, and using the best of today’s digital technology to its fullest advantage, the savvy financial advisor can avoid many of the more common errors inherent to modern investment. This is the core essential strategy to minimizing risk and optimizing gains, whether investments are being made by a private citizen or a larger organization.
Related Resource: Top 10 Best Online Master’s in Finance Degree Programs
