Why should you be careful with Master Limited Partnerships?

If you`re interested into investing, chances are you have some insight on how things work. But understanding the basics is far from enough if you want to protect yourself and avoid risky investments. In order to see your investment portfolio growing you will need help from others, good intuition and a lot of luck. In this article we will be talking about Master Limited Partnerships (MLP), and Exchange Traded Funds (ETF). First of all, what is Master Limited imagesPartnerships? Known as a publicly traded partnership on a given exchange, it`s basically a mixture of a traditional limited partnership and traded security. Important detail is that an MLP doesn’t have anything to do with a corporation. Legally all MLPs are a form of partnership. They are very attractive to investors because they offer very high yields and, since this partnership is considered to be pass-through, the entity is excluded from paying taxes (individual partners only have the obligation to pay taxes on their share of the profits):

As an MLP unit holder, the initial tax basis is the amount you pay for the shares. Size of the basis can vary in size, for each distribution and allocation. It`s easy to conclude that MLP units definitively worth more than a corporation ones.

MLPs are very risky investments because they are seriously affected by whatever is happening on the market (unstable economy has a huge impact on MLP`s value). Besides that, decline in commodity prices (whatever may be the reason), also make a big impact on MLPs.

Some of the most simple steps you can follow in order to lower the risk of your investments are:

• You must make a good study of the percentages of how will your portfolio react on the investments you make. You will eventually understand how the system works, so it will be easier to make a decision. Predicting the future is impossible and that`s why there`s always a chance of possible loss.

• You will need to learn how to measure the risk of your investments. There are numerous methods to do so, and they will help you make a decision whether you should invest or not.

• Before investing, make a good research about it, because you cannot be sure whether it`s a scam or not.

• Learn how to incorporate systematic and unsystematic risks when making an investment. Systematic (market) ricks are unavoidable, while unsystematic (firm-specific) can be reduced with portfolio diversification.

An exchange-traded fund is one that owns shares of stocks, gold bars, foreign currency or oil futures (underlying assets), and divides ownership of them into shares. The investment vehicle structure can vary by country, and within one a multiple structures may co-exist. One of the important advantages of exchange-traded fund ( and MLP exchange-traded funds), is that investors can sell short or buy on margin and even purchase only one share, with no deposit requirements. Their expense ratios are way lower than the ones of the average mutual fund. Besides that, commission to your broker is the same, just like when you pay on any regular order.

  • Diane Boyd
    I like to focus more on people than technology. I have a passion for teaching.