Mutual Fund I

I've been investing in Mutual fund for as long as I've been working. I used to look up all the mutual funds my company offer, picked the ones with best returns and tried to diversify as much as possible. So far that strategy worked pretty well for my 401k. It was pretty easy since my company would offer only a few funds to choose from.

Investing in mutual funds with my savings is a different story. The goal is different and the amount invested in is different.

Fool.com's article on Mutual fund suggests this strategy

"BUY AN INDEX FUND"

Why? The article states that most "managed" funds have higher cost and 90% underperform an index fund. Hey that sounds good enough of a reason for me. I have seen a lot of mutual funds underperform myself. Sure, the market can go down, but history shows that it goes up, and beats inflation.

Different Kinds of Funds:
Bond Funds: Just bonds. Kinda like a bond with interests.
Balanced Funds: Bonds + stocks, about 50/50.
Stock Funds: Stocks, could be based on company size or category (value, income-based, etc)
International/Global Funds: Companies with homes with value beyond those of US
Sector Funds: such as financial, computer, whatever industry

Options!

I've heard so much about options before but I honestly had no idea what it is. Even now that I've read about it, I'm still a little confused.

At first when I heard about options, I thought it sounds like stock options that you get from a company. Turns out, it's not all that different. Instead of being granted the options, they have to be purchased. When you buy options, you are buying the RIGHT to purchase stock at a certain price (Strike price) with an expiration date.

Expiration date:
American style lets you purchase BEFORE or ON the expiration date
European style only lets you buy ON the expiration date

Call options: You are betting that the stock will go up. So the writer of the stock has to pay you more money than your strike price
Put options: Opposite of call. You are betting the stock will go down

Pro:
You are buying the option not the stock, which is usually cheaper. So you can potentially get a much higher return than what stock can give you.

Con:
If you exercise the option at the wrong time, your loss can be limitless. The expiration date makes it hard to make money.

How to make money:
You can exercise the option if you actually bet correctly OR
You can trade the option. If the option looks good, people will pay more than you did for them. Think Google. Say you bought options at at 100 strike price. You want to sell it when it's 200, but it looks like it'll go up to 400 before the expiration date. Then the option is going to worth more than when you bought it.

Options look pretty cool, but I'm not sure I'm ready for this kind of high risk investments yet.

Stock basics

I guess I won't really learn about how to invest in stocks unless I know what stocks are. What I know is that stock is owning a part of a company. That was pretty much all I knew. Maybe that's why my investment hasn't been doing all that great in the past.

There are 2 kinds of stocks:

1. Common share - It's 1 kind of stock for the company. Everyone owns it the same way.
2. Diff classes of stock - So apparently some companies don't like to let everyone to vote on everything. They decided that for certain important issues for the company, a different set of stock owners can make the decisions. I don't know, it sounds kinda fishy. It's like come and invest but you don't get a say on things. Media companies do that a lot.. no wonder.

Stocks are traded like in the movies. Someone yells to sell in a big old market, and someone yells to buy. Well, except Nasdaq. They have market makers. The "market makers" buys when someone is ready to sell, and sells when someone is ready to buy. Market makers are such experts that they can make money from trading low and selling high.

I was gonna blog on options, but it is totally new for me. I'll dedicate the next post on that and maybe a few other things on stocks.