Investment basics

Stocks, Bonds and Mutual Funds…all can be valid investment types based on your wants and needs. Let’s take a brief look at each and see the differences.

Stocks (also known as equities) are units of ownership in a corporation. Many factors influence the value of a stock, but a company’s earnings generally have the biggest impact. As earnings increase, the value of the stock typically increases, too.

Bonds are loans or debt instruments issued by governments or corporations to raise money. These instruments are issued for a stated period, during which interest payments are made to the bondholder. Bonds may be bought or sold, and may gain or lose value, as investment property.

Mutual Funds are a professionally managed investment vehicle that pools money from many investors to buy stocks, bonds, short-term money market instruments and/or other securities. The fund is overseen by a board of directors or trustees charged with ensuring that it is managed in the best interests of investors, and with hiring the mutual fund manager, who buys and sells assets in accordance with the mutual fund's investment objective. Because a mutual fund buys and sells a large number of investment shares at a time, management costs are designed to be lower per investor than they would be if an individual investor purchased individual stocks and bonds.

Key definitions

Asset Classes (Types) – The investments available for participant contributions and assets. In general, asset classes may be divided into stocks, bonds and cash and cash-like products including money market instruments, Treasury bills and CDs. Retirement plans typically offer mutual funds comprised of stocks, bonds, cash or a mixture of them.

Annualized return – The rate of return for a given period that is less than one year, but computed as if the rate were for a full year.

Allocation (Asset allocation) – The strategy of spreading investment funds across asset classes, such as cash and fixed income, bonds and stocks to help minimize risk. This may help manage the risk of investing in part because these investment categories respond to changing economic and political conditions in different ways. The use of asset allocation does not guarantee returns or protect from potential losses.

Capital Gains – The profits paid to shareowners from the sale of stocks and/or bonds.

Class of Shares – The types of listed company stock that are differentiated by the level of voting rights that shareholders receive. A company may have several different share classes, or classes of stock, such as Class A, Class B, Class C, etc. Load mutual funds have three share classes: Class A, Class B and Class C. Each have different sales charges, 12b-1 fees and operating expense structures.

Diversification – The portfolio strategy designed to spread risk by allocating assets among a variety of investments, such as short-term investments, bonds and stocks.

Dollar Cost Averaging – The investment strategy that invests fixed amounts at set intervals, such as monthly or biweekly. Over the long term, a particular investment is purchased with a fixed dollar amount on a regular schedule, regardless of the share price. This assumes more shares are purchased when prices are low, and fewer shares are bought when prices are high.

Expense Ratio – The annual fee all mutual funds or exchange-traded funds charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs and all other asset-based costs incurred by the mutual fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the mutual fund's average net assets, is accrued on a daily basis. It should be taken into consideration when choosing mutual funds.

Market Timing – The frequent movement between and among mutual funds to potentially capitalize on perceived or anticipated market trends. Market timing does not ensure profitability and, because it often operates to the detriment of other investors, fund managers may assess fees on sales of funds held for short periods.

Net Asset Value (NAV) – Regarding mutual funds, it’s the market value, or price, of a share. It’s calculated daily by dividing the total net assets of the mutual fund by the number of shares outstanding.

Rate of Return – The percentage of change in an investment, including appreciation or depreciation and dividends or interest, over a given time period. Most rates of return of funds within a retirement plan are expressed on an annual basis (“annualized”), unless stated otherwise.

Rebalance – The strategy to sell investments that have been performing well and invest more into those that have fallen behind – a buy low, sell high approach. It won't change how future contributions are invested and is sometimes referred to as an end-result exchange.

Rollover (Pretax) – The Amounts transferred to the plan from an eligible retirement plan or IRA. Reinvestment of assets into an IRA that an individual receives from a qualified tax-deferred retirement plan. It must be reinvested into an IRA within 60 days to avoid tax and penalties.

Roth Contributions – The designated employee after-tax pay that’s contributed to a participant’s 401(k), 403(b) or governmental 457 plan account. Subject to certain restrictions, distributions of earnings from the Roth account may be taken tax free. There are several different types of Roth accounts including and not limited to IRAs, 457(b) and 401(k).

Stable Value Fund – The investment option that's focused on the preservation of capital. Comparable to a Money Market Fund, it’s a conservative option with low risk and low reward.