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Investment Vehicles

Once you work out what asset class you want to invest in, whether you want to invest in stocks or bonds or one of the alternatives, you must then decide how to invest, what investment vehicle to use in order to put your money into whatever security you decide on. An investment vehicle is simply a means by which to invest in a particular asset.

DIRECT OWNERSHIP

DIRECT OWNERSHIP


This is, quite simply, the buying and ownership of shares or other types of investment assets by private investors, not via mutual funds or trusts. This is the most direct way of investing in stocks, and it gives you the most control over what is held in your investment portfolio, as well as the most exposure to any upside or downside by a specific company.

MUTUAL FUNDS

MUTUAL FUNDS


This is an investment vehicle, also known as an Open-End Fund, which is essentially a pool of funds from a bunch of different investors which is given to a fund manager to invest in a variety of different assets and build an investment portfolio. Each investor owns shares which represent a portion of their holdings in the fund, and the fund is structured to match the objectives stated in its prospectus. An investor can earn money from dividends when investing in stocks and interest on bonds,…

EXCHANGE-TRADED FUNDS (ETF)

EXCHANGE-TRADED FUNDS (ETF)


This is a fund which issues a block of shares which are then traded on the exchange and where shares are bought and sold between investors as opposed to through the fund itself. It is similar to an index fund, in that it tracks a specific index or market, or a portion of it, but with the big difference in that it can be traded like any other normal stock and thus its price will adjust throughout the day, unlike mutual funds which have their net asset value (NAV) calculated once at the end of…

CLOSED-END FUNDS (CEF)

CLOSED-END FUNDS (CEF)


This is an investment vehicle whose shares trade on the stock exchange. These funds raise a fixed amount of capital through an Initial Public Offering (IPO) by issuing a fixed number of shares which are purchased by investors as stock (at any time of the day, unlike Mutual Funds where can only be traded at a specific time of day specified by the managers) and are not redeemable from the fund (unlike Mutual Funds), and where new shares are then not created by managers to meet demand from…

HEDGE FUNDS

HEDGE FUNDS


This is a high risk high yield vehicle not normally associated with novice investors just starting to build their investment portfolio. A hedge fund will be aggressively managed and use high risk methods, like investing in stocks with borrowed money in order to realize huge capital gains, with the aim of outperforming the market. They are pretty flexible vehicles since they employ different investment strategies, with diversity in the risk attributes and the investment opportunities, which…

PRIVATE EQUITY

PRIVATE EQUITY


This vehicle consists of private investors and funds which make investments directly into private companies, in other words companies whose shares do not trade on public exchanges and which are not issued through IPOs, or make buyouts of public companies. These vehicles are strictly for institutionalized investors or accredited investors with extensive experience in building an investment portfolio who deal in amounts big enough for them to qualify for preferential treatment and lower…

DIRECT OWNERSHIP

This is, quite simply, the buying and ownership of shares or other types of investment assets by private investors, not via mutual funds or trusts. This is the most direct way of investing in stocks, and it gives you the most control over what is held in your investment portfolio, as well as the most exposure to any upside or downside by a specific company.

MUTUAL FUNDS

This is an investment vehicle, also known as an Open-End Fund, which is essentially a pool of funds from a bunch of different investors which is given to a fund manager to invest in a variety of different assets and build an investment portfolio. Each investor owns shares which represent a portion of their holdings in the fund, and the fund is structured to match the objectives stated in its prospectus.

An investor can earn money from dividends when investing in stocks and interest on bonds, since mutual funds pay out any income they receive to its owners, but also if the fund sells securities which have increased in price thus attaining capital gain which usually gets passed on to the investors. Also, if fund holdings increase in price but are not sold by the fund manager, causing the fund’s shares to increase in price, the investor can then sell them for a profit.

Mutual funds are a pretty easy, low cost way for a novice investor starting an investment portfolio to get a full-time experienced professional manager to make investments and monitor their money, and they also offer diversification since mutual funds tend to typically invest in a very large number of assets, which a novice investor acting alone might not be able to do. However, there is usually a minimum amount on purchases or sales, and any new withdrawal or investment affects the fund’s assets.

An Index Fund is a type of mutual fund where, rather than the fund owning a bunch of different stocks, they own an entire market, or a portion of the market, thus mirroring the returns of a specific market.

EXCHANGE-TRADED FUNDS (ETF)

This is a fund which issues a block of shares which are then traded on the exchange and where shares are bought and sold between investors as opposed to through the fund itself. It is similar to an index fund, in that it tracks a specific index or market, or a portion of it, but with the big difference in that it can be traded like any other normal stock and thus its price will adjust throughout the day, unlike mutual funds which have their net asset value (NAV) calculated once at the end of every day.

The actual structure of this vehicle will vary from country to country and shareholders earn profits via interest or dividends, and they may also get a residual value if the fund is liquidated.

Investors using this to build their investment portfolio have the advantage of the diversification of an index fund, the ability to ‘sell short’ (the selling of a security which is not actually owned by the seller), which is a practice strictly for the experienced investor, ‘buying on margin’ (investing in stocks via borrowed money from a bank or a broker), and the fact that there is no minimum deposit requirement, which means that you can buy as little as one share. Also, the operating costs of running that fund, as far as the individual investor is concerned, tend to be lower than that of mutual funds, with lower overhead expenses and management fees.

CLOSED-END FUNDS (CEF)

This is an investment vehicle whose shares trade on the stock exchange. These funds raise a fixed amount of capital through an Initial Public Offering (IPO) by issuing a fixed number of shares which are purchased by investors as stock (at any time of the day, unlike Mutual Funds where can only be traded at a specific time of day specified by the managers) and are not redeemable from the fund (unlike Mutual Funds), and where new shares are then not created by managers to meet demand from investors (unlike Mutual Funds).

One of the key advantages is that CEFs normally trade at lower than their net asset value (NAV) which means that people investing in stocks buy in at a discount, they have no minimum amounts on purchases or sales, and they also have lower ‘expense’ ratios. These funds tend to have a specialized investment portfolio of securities which usually concentrates on a specific industry, and the fund’s stock price will fluctuate according to market forces, as well as to the changing prices of the securities the fund is holding. They also have the opportunity to increase their leverage by borrowing, although many will choose not to do so since this would increase the likelihood of share price volatility and market risk, and it is easier for the fund managers to control or manage the investment portfolio since they are dealing with one stable pool of capital.

HEDGE FUNDS

This is a high risk high yield vehicle not normally associated with novice investors just starting to build their investment portfolio. A hedge fund will be aggressively managed and use high risk methods, like investing in stocks with borrowed money in order to realize huge capital gains, with the aim of outperforming the market.

They are pretty flexible vehicles since they employ different investment strategies, with diversity in the risk attributes and the investment opportunities, which means that they offer the investor a range of choices among investment attributes. They are also notorious for being less regulated than other structures, being less transparent, having low liquidity with longer lock-ups of capital and longer notice periods, and high management fee structures.

PRIVATE EQUITY

This vehicle consists of private investors and funds which make investments directly into private companies, in other words companies whose shares do not trade on public exchanges and which are not issued through IPOs, or make buyouts of public companies. These vehicles are strictly for institutionalized investors or accredited investors with extensive experience in building an investment portfolio who deal in amounts big enough for them to qualify for preferential treatment and lower commissions, and also less protective regulations since it is assumed that they have more experience and can thus protect themselves. Investing in stocks through such a vehicle means you must be able to commit large sums of money for long periods of time.

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