Mutual Funds For Beginners Part Three

By: Mallory Megan

In article one in my series on mutual funds, I very quickly wrote about the very basics. I let you know about securities, which in layman's terms is something that represents money. I spoke about two kinds of securities, bonds and stocks. I laid down the basics about stock markets and bonds markets, and wrote that if you wanted to invest in or sell stocks and bonds you are going to need the help of a dealer or broker.

In article two, I covered the basics of mutual funds, which are set up like trusts or corporations. I told you that mutual funds pool money from a number of different investors and invest it in different types of securities. I also mentioned that mutual funds have a fund manager that buys and sells the fund's investments.

Mutual funds have the capacity to invest in all sorts of securities, the most common ones they invest in being stocks, bonds, other mutual fund shares, and things called derivatives (these include forwards, futures, options, and swaps.) A derivative is a security whose value is based on the underlying value of the stock it is based on. Take an option for example.

One type of option might be the right to buy additional stock from a company at a set price. If the value of the stock is high, and you have this option to buy stock for a very low price, you can see that this option is lucrative, and that it might not be so lucrative if the same stock plummets in value, a value even lower than you have the right to buy it for.

Some funds are known as specialty or sector funds. These funds will go out and only invest in particular things. One fund might invest mostly in the shares of a particular industry, like technology or financial services. Some mutual funds might invest in mostly American securities, mostly foreign securities, or both. Most mutual funds are continuously monitored by someone called a portfolio manager and their assistants. These people will invest the funds' assets according to its investment objective, trade securities in order to make the most money, and check on the ongoing performance of the current investments.

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