STEP-1 , Review the Bond interest rate and par value
Bonds are unlike stocks in that they represent debt the company owes rather than an ownership position. The interest rate the bond pays out over its life is already established at the time the bond is issued. The trading price of a bond does change during the holding period, but these changes are based on whether the interest rate provided in the bond payout is greater or less than the general market rate. You can read the bond issue price, par value, and interest rate before purchasing, to determine whether it is a worthwhile investment.
It is possible to buy a bond for one price and then sell it before maturity for more. Most investors make money by collecting the bond’s interest payments every six months, and reinvesting the par value of the bond upon pay out.
When interest rates go down, existing bond values rise. When interest rates rise, existing bond values go down. It is possible that, with significant shifts in interest rates, the value of your bond can change significantly.
STEP-2 , Read about Stocks and Bonds within a Mutual Fund
Mutual funds are pools of managed securities that you can purchase a share in.For example, a bank such as chase may invest $1,000,000 in a fund that includes many different stocks, bonds, and other securities. Then the bank sells shares of this fund to individual investors. By purchasing a share of a mutual fund, you automatically diversify your portfolio, because one share of a mutual fund is an investment in many different securities.
Mutual funds are generally not trading vehicles, however, as they are managed by an investment advisor.
Some mutual funds are classified by the sector of the market they invest in most heavily, such as technology, transportation, or retail. However, you can also purchase mutual funds that are intentionally diversified with multiple market sectors, to diversify and create the most secure investment.
Use your investment strategy to inform what kind of mutual fund is best for you. Get a copy of the mutual fund prospectus and review the objectives, risks, fees, and expenses involved.
STEP-3 , Consider Exchange Traded Funds (ETFs)
An Exchange Traded Fund is similar to a mutual fund but is not managed. The securities within the ETF are designed to reflect the price movements of stock indexes such as the S&P 500. Shares of ETFs are purchased just like shares of stock and are traded on stock exchanges. They also have low fees compared to mutual funds and are considered to be highly liquid. This makes them a good investment vehicle for private investors.
STEP-4 , Read Market Data on Futures and Options
Futures are contracts to take delivery or make delivery of an asset like a physical commodity (corn, oil) or financial instrument (currencies of countries) at a predetermined price and point in the future. Options differ from futures in that owning an option does not require one to exercise their right to buy or sell during the term of the option.
For example, an investor might buy a futures contract to deliver 5000 bushels of wheat at $5 per bushel six months from today’s date, hoping that prices will fall before delivery. An investor who believes wheat prices will rise in six months would buy a contract to receive 5000 bushels at $5 per bushel in six months.
As a beginner, you should avoid investing in futures unless you plan to get more training, as they are very complex and require specific knowledge of commodities like oil.
A common example of futures and options relate to the price of a barrel of oil. Speculators purchase futures and options, predicting that their stated future price will be lower or higher than the actual price of the oil when the exercise date arrives.