This is the first installment of a five-part feature on investing. We hope that our readers use the series to learn more about this important subject. From building institutions to preparing for our own retirement, investing is an important, though often misunderstood, part of the American Muslim experience.
Stocks explained Simply put, a stock equals ownership. More specifically, it represents a share of ownership in a business. And businesses issue stock when they want to raise money for new projects. If you hold one or more shares of stock in a company, you actually own a tiny piece of that company. This means that you have a claim on future earnings, and you’re able to voice your concerns about the direction of the company at shareholder meetings. Many large corporations—Apple, Coca-Cola, General Electric, etc.—are available for public investment. And you can own a piece of them by owning their stock.
When they issue stock, companies generally like to start out by setting their prices at less than $100 per share, but the price of stocks moves up or down, depending on the public’s level of interest in owning the shares. You might remember that Facebook made news last year when its shares were opened to the public for trading. That launch, called an initial public offering, fell flat as traders and analysts worried about the number of new users Facebook could attract and whether the company could meet financial expectations by selling advertisements. Because the public wasn’t convinced Facebook could make money, the stock declined over the following weeks.
Investing in stocks through mutual funds So, how does someone become an owner, or stockholder, in a company? One way is by opening an account with a brokerage firm and buying and selling stocks yourself. But owning individual shares of stock can be a challenge. Taking the time to pick stocks one-by-one and then monitoring them is often too time-consuming and daunting for many. A popular way to invest in stocks is through mutual funds. They offer certain advantages over purchasing individual stocks. Mutual funds—like the Azzad Funds—pool the assets of a large number of investors and buy stocks or other investments on behalf of those people. They can offer professional money management and a more diversified portfolio (in other words, a mix of stocks that might not all go up or down in price at the same time). A typical mutual fund may invest in a couple hundred or so companies from lots of different industries, anything from carmakers like General Motors to clothing retailers like Gap. And mutual funds issue their own shares to investors, which means that you become a part owner of the pool of investments directed by the fund’s money managers. Those mutual fund shares, like shares of stock, are redeemable, meaning that they can be sold back to the fund at any time for the current market value, minus redemption fees. Think of it like this: You invest in the mutual fund, which takes that money and then invests it in stocks on your behalf. Like investing in individual stocks, investing in a stock mutual fund involves certain risks, including the possibility that you may lose money. Mutual funds are not guaranteed or insured by the FDIC or any other government agency. But on the other hand, you should know that all mutual funds must comply with a strict set of rules monitored by a U.S. regulator, the Securities and Exchange Commission.
And however you choose to invest, it’s important to find the right investments for your needs. Stay tuned for next week’s article, How to find halal stocks and stock funds.
Joshua Brockwell works as Investment Communications Director at Azzad Asset Management, headquartered in the suburbs of Washington, DC. Azzad serves as investment adviser to the Azzad Funds and is a Registered Investment Adviser (RIA) with the Securities and Exchange Commission (SEC). Azzad is committed to managing clients' money according to a socially responsible investment philosophy based on Islamic values and incorporating a rigorous and disciplined investment approach.
Mutual fund investments, including the Azzad Funds, are not FDIC-insured, so you may lose money. The Azzad Funds are available by prospectus only, which includes more information about the Funds’ objectives, risks, charges and expenses. Please read the prospectus before sending any money. To request a free copy, please call 1-888-862-9923, or visit us online at www.azzadfunds.com. Azzad Asset Management serves as the investment advisor to the Azzad Funds, which are self-distributed. 4/13.