Investing Basics
- sarahelizabethstoc
- 6 days ago
- 3 min read
Although there is a lot of incredible free information available for parents online about investing and finance, I have been finding that these articles and social media reels are lacking several key fundamental basics. A parent that is new to investing may not know the difference between a mutual fund, a stock and an ETF, let alone how to pick which ones they should invest their child’s IRA savings in. In this post, I'll provide definitions of the most commonly used terminology in finance and investing content across the web and guidance on some of the largest, well-established and low cost mutual funds and ETFs that you can consider for investing your child’s IRA in today.
Key Definitions:
Index Fund - A type of mutual fund or exchange-traded fund that seeks to track the returns of a market index before fees and expenses. Examples of market indexes that are most commonly tracked in index funds are: the S&P 500, the Russell 2000 and the Wilshire 5000.
Market Index - Measures the performance of a group of securities that are publicly traded. The S&P 500 represents a market index.
Standard and Poor’s 500 - Otherwise known as the “S&P 500,” is a market-capitalization-weighted index of approximately 500 of the largest publicly traded U.S. companies that meet specific eligibility criteria established by S&P Dow Jones Indices. It is widely used as a benchmark for the performance of the U.S. stock market.
Dow Jones Industrial Average - Otherwise known as the “Dow,” is another closely followed market index. The Dow is only composed of 30 companies, excluding companies that operate in the utilities and transportation sectors.
Nasdaq Composite Index - Otherwise known as the “NASDAQ,” tracks roughly 3,000 companies, both US and international, that are traded on the NASDAQ stock exchange. The NASDAQ stock exchange is one of the largest stock exchanges in the entire world.
Russell 2000 - Tracks the performance of roughly 2,000 small-cap publicly traded companies in the US. This is a market index that serves the purpose of providing a true measure of the performance of smaller domestic corporations.
Stock - A stock represents ownership in a publicly traded company. When you purchase a share of stock, you own a small portion of that business and may benefit if its value increases or if the company pays dividends.
Mutual Fund - An investment program funded by shareholders that trades in diversified holdings and is professionally managed.
Exchange-traded Fund (ETF) - a tradeable investment fund that holds many investments and is generally organized around a specific strategy, theme, or market exposure. Unlike mutual funds, ETFs trade on exchanges just like stocks, and their price changes throughout the day, providing liquidity and flexibility.
New York Stock Exchange - the other of the two largest stock exchanges in the US.
Historical Performance and Returns:
Once you have set up your child’s IRA or general brokerage account, you need to select investments. Paying a financial advisor can be costly so I recommend selecting a variety of low cost ETFs and mutual funds that track the largest indices. This provides you with investment diversification without having to individually hand pick stocks. Here is a snapshot of the largest and most reputable ones you can check out and perform further research on.
Name and Ticker | Investment Type | Index Tracking | Annualized Market Price Returns | ||
1-Yr Return | 3-Yr Return | 5-Yr Return | |||
Vanguard (VOO) | ETF | S&P 500 | 22.3% | 20.6% | 13.4% |
Black Rock (IVV) | ETF | S&P 500 | 22.1% | 20.5% | 13.3% |
State Street Global Advisors (SPY) | ETF | S&P 500 | 22.3% | 20.6% | 13.4% |
Fidelity Investments (FXAIX) | Mutual Fund | S&P 500 | 22.3% | 20.6% | 13.4% |
Vanguard (VFIAX) | Mutual Fund | S&P 500 | 22.3% | 20.6% | 13.4% |
Invesco (QQQM) | ETF | NASDAQ | 26.9% | 24.3% | 17.9% |
Invesco (QQQ) | ETF | NASDAQ | 26.9% | 24.3% | 18% |
Fidelity Investments (ONEQ) | ETF | NASDAQ | 25.5% | 22.7% | 16.7% |
State Street Global Advisors (DIA) | ETF | DOW | 20.3% | 16.9% | 10.6% |
Disclaimer: Past performance does not guarantee future results. Investment returns will fluctuate over time, and all investments involve risk, including the possible loss of principal.
Investing Resources
SEC Website for Investors - https://www.investor.gov/
Fidelity Article on ETFs - https://www.fidelity.com/learning-center/smart-money/what-are-etfs
Fidelity Resources on Mutual Funds - https://www.fidelity.com/mutual-funds/overview