You have many choices today when creating your investment portfolio. You can invest several ways, such as by purchasing stocks, bonds, mutual funds or exchange traded funds. You also can invest in hedge funds or establish a separately managed account.

As you consider how to build your portfolio, it's important to understand some of your options.

Stocks and Bonds

  • Stocks
    Stocks are ownership shares in a corporation. A corporation's shareholders own a portion of the whole company.
  • Bonds
    Governments and corporations issue bonds, which are purchased by investors. The issuers agree to repay investors with interest within an agreed amount of time. The principal amount is repaid when the bond matures.
  • Minimum Required Investment
    Brokers typically purchase a minimum block of 100 stock shares at a time and may charge more for purchases of less than that. Share prices vary from stock to stock and change throughout the day. Bond prices typically range from $10,000 to $250,000. Prices vary by bond type.
  • Fees
    You pay a commission to purchase most stocks or bonds through a broker.
  • How You Purchase
    A broker typically buys stocks on your behalf through an exchange or electronic market. You can buy government and corporate bonds through your broker. You can buy Treasury issues, such as notes and bills, directly from the U.S. government.
  • Liquidity
    In most cases, you or your broker can buy or sell individual stocks and bonds during the trading day at the current price.

Mutual Funds

  • Definition
    A mutual fund combines the money of many investors. Professional fund managers use the pool of money to purchase stocks, bonds and other securities that meet a fund's investment objective.
  • Minimum Required Investment
    Minimums can vary widely among mutual funds. They typically range from $500 to $10,000.
  • Fees
    No-load funds: Management fees for no-load funds typically range from .5% to 2% of the fund's assets.
  • Load Funds
    Front-end, back-end and level loads: Fees for equity front-end load mutual funds typically range from 2.5% to 5.75%. Fixed income front-end load mutual fund fees range from 1% to 6.25%. You pay these fees up front when securities are purchased. You also could have a back-end load mutual fund in which you pay a sales charge when you sell shares, or a level-load, which is an annual sales charge. These fees vary, so contact your broker or advisor for specific fund fees.
  • How You Purchase
    You can invest in a no-load mutual fund directly through the investment management company or fund supermarket companies that don't charge a transaction fee. Most load funds must be purchased through a broker.
  • Liquidity
    You or your broker can buy or sell shares in a mutual fund throughout the trading day. However, funds are priced only once a day so you'll buy or sell at the closing price, which is determined after you place your order.

Exchange Traded Funds

  • Definition
    Similar to a mutual fund, an Exchange Traded Fund (ETF) represents a group of securities but the ETF trades on an exchange like an individual stock. An ETF generally follows the performance of an index, such as the Standard and Poor's 500 Stock Index.
  • Minimum Required Investment
    Similar to individual stocks, ETFs are purchased at prices set by market demand, typically close to the net asset value of their portfolios.
  • Fees
    Fees tend to be lower than those of other investment types, with expense ratios typically ranging from .09% to .99%. In addition, you must pay a brokerage commission to make your trades.
  • How You Purchase
    Typically, a broker buys shares of an ETF on your behalf through a stock exchange.
  • Liquidity
    You can buy or sell ETFs throughout the trading day at the current price, which changes throughout the day.

Hedge Funds

  • Definition
    A hedge fund is a private, mostly unregulated investment pool that can invest in a wide range of investments including stocks, bonds, commodities, currencies or derivatives (such as options or futures). Hedge funds use leverage (borrowing) and other aggressive strategies to increase returns.
  • Minimum Required Investment
    Minimums vary widely but typically range from $250,000 to $1 million.
  • Fees
    Investors generally pay 1% of the net asset value of the fund as an administrative fee to the hedge fund manager. The fund manager also typically receives a performance fee of 10% to 20% of the net profits, assuming the fund meets its investment goals.
  • How You Purchase
    Hedge funds usually are partnerships offered on a private basis to a limited number of investors. You must be a qualified or accredited investor, meaning you meet certain income and net worth requirements.
  • Liquidity
    Since hedge funds are very aggressive investments, general managers of the funds may predetermine how long an investor must remain invested and at what time purchases or sales will take place, which makes the funds less liquid than other investments.

Separately Managed Accounts

  • Definition
    A separately managed account holds a collection of individual securities managed professionally for an individual investor. It can be customized to meet investor needs.
  • Minimum Required Investment
    Minimums typically range from $100,000 to $500,000 but can be as low as $50,000.
  • Fees
    Fees typically range from 2% to 3.5% of the account's assets. Fees are often negotiated and generally are reduced as assets rise.
  • How You Purchase
    Your investment manager makes buy and sell decisions of securities based on your agreed strategy for the account, which may include restrictions on buying or selling certain securities.
  • Liquidity
    Your investment manager can buy and sell securities in your account throughout the trading day.

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This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.