If you’re unfamiliar with the investment world, it can be daunting to jump in. The different terms and approaches can sound confusing, and it can even prevent people from investing in the first place. Our trust and investment team has a proven track record of success, and they can put you at ease with their hands-on, service-oriented approach.
Still, it’s important to understand investment fundamentals and familiarize yourself with what’s being done with your money. Even if you’re familiar with some of the basic terms, a refresher can always help. We’ll break down some of the basic fundamental and terms when it comes to investing, putting you on more confident path to maximize your returns.
What is a fiduciary?
A fiduciary has to put the client’s best interests first. They have a duty to put themselves in the client’s shoes and make the best possible investment decisions for them. They work on the client’s behalf and are focused on meeting the needs of the client.
Is there a difference between a brokerage firm and a fiduciary? A brokerage firm only has to make sure the products fit the client, not ensure those investment choices are actually the best fit. They are not solely looking out for the best interest of the client.
Example: If someone is 55 years old and has money in their savings, a brokerage firm might sell an annuity. But they don’t have to determine the best or most cost-efficient fit for the solution, just that they were allowed to sell based on age and money involved. A fiduciary finds the absolute best fit for the client based on their profile, risk involved, cost and more.
What’s the difference between a stock, bond and mutual fund?
We build investment management portfolios based on 3 things:
- Equities – stocks
- Fixed income – bonds
A stock is a security that represents ownership in a corporation. If you purchase a stock, you take ownership of the company, and take part in their growth and interest. In short, stock = ownership.
A bond is a fixed-income security from a government entity, municipalities or corporation. You usually receive a fixed interest rate and you’re the lender. There’s typically less risk involved and it’s viewed as a safer investment vehicle. In short, bond = lending.
Cash is another investment type, and includes currency and cash alternatives that offer low risk and high liquidity. That includes items like savings accounts, money markets, short-term treasury, commercial paper and certificates of deposits (CDs).
A mutual fund could be a combination of stocks, bonds and other securities (like cash) purchased and managed by an investment teams, or just one of the three major asset classes. Investors typically purchase mutual funds to add diversification to portfolios. It can include a wide range of large, medium, small-level companies – with a multitude of possible options – within their mutual fund to reduce risk.
How do ETFs (exchange-traded funds) and mutual funds work?
Mutual funds are classified by how the fees are charged to the consumer. Some contain a sales charge called a load, while other mutual funds are no-load, meaning there isn’t a sales charge. Here’s how that breaks down with the most common mutual funds:
- Load Mutual Fund
- Class A: The client pays commission up front when purchasing shares of the fund.
- Class B: The client pays commission at the end when redeeming or selling the shares.
- Class C: There is no sales load at the beginning or end, but the commission is paid along the way. It is an annual charge and a fixed percentage.
- No-Load Mutual Fund
- There is no commission or sales charge involved when a person purchases or sells their shares. But there could still be fees involved during the process.
- Shares can only be sold or redeemed after a specific period. Selling early incurs a fee.
- You can talk to your representative to find out how they charge their fees.
An ETF is a portfolio of securities assembled by an investment company. Unlike mutual funds, ETFs can be traded throughout the day, meaning prices changes throughout the day as well.
Mutual funds are only traded at the end of the day, no matter what time you buy. They are traded only on their price at the end of the day.
Whatever the ETF strategy is, it is set to typically mirror an index. That means we pick an index and mirror what is in there. But ETFs are typically extremely low cost because there is no active management component.
That makes them a common choice for trust portfolios. Our trust and investments team use indexes and ETFs to minimize the cost to clients. The lower the expense to you, the more money you can get in your long-term pocket.
This should give you a basic understanding of general investment terms, but if it’s time to bring in a professional, we hope you consider our advisors at Carolina Alliance Bank. Our team is dedicated to answering your questions and providing solutions for your investment needs. Please call us at 844-289-0050 and we can tell you more about the extensive services we offer.
Investments are not FDIC insured, not bank guaranteed, and may lose value.