On to the FUN stuff: investments. I'm sure that you've watched the news recently (please tell me you have), and you've seen that the U.S. economy is not in the best of conditions. You've heard statements such as, "Stocks are up", "The Markets are down", and "Bond yields are rising." At this point, your eyes glaze over, and you wonder to yourself, "What are they talking about?" After reading these upcoming posts, you will have a better understanding of what those terms mean, and you'll sound smart when you're having dinner with friends.
First up, stocks. What are stocks anyway? A stock is a type of security or financial instrument that represents ownership in a corporation. In simple terms, if you own stock in a particular company, you own a little piece of that company. You will also hear stock referred to as "shares". There are two types of stock: (a) common and (b) preferred. What's the difference? If you own common stock, you are able to vote in shareholder meetings and receive dividends. If you own preferred stock, you don't have voting rights, but you receive dividends before those who own common stock. 10-second lesson: Dividends are simply portions of the company's profits that it distributes to shareholders, usually on a per-share basis. So if you own 100 shares, and the company declares a $.50 per-share dividend, you'll be getting back $50 (excluding taxes). Also, if you are a preferred shareholder, you have priority if the company goes bankrupt. For the most part, when you hear people say, "Stocks are up", they are referring to common stock. A question you may be asking yourself is, "Why do companies issue stock?" The answer is simple: to raise capital (funds).
Next, bonds. You've probably heard the term "bonds" or "fixed income securities" thrown around by old people (or youthfully challenged folk). What does it all mean? I'll give you the Investopedia definition: A bond is "a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities." In English, with bonds, you are basically lending your money to a company or the government for a certain amount of time.
Third term: mutual funds. A mutual fund is an investment company that essentially pools the money and resources of several investors/shareholders together and invests in a variety of securities (i.e. stocks, bonds) to achieve a specific objective over time. So when you invest in a mutual fund, you are actually buying shares of the mutual fund, not the individual stocks or other components of the fund. Mutual funds usually have what is known as a fund manager who is responsible for investing the pooled money into the different securities. What's so great about mutual funds is that they provide diversification to your portfolio. 10-second lesson: Your portfolio is your personal arragement/grouping of financial securities that you've purchased. Diversification is a strategy in which you combine/mix different types of investments in your portfolio in order to reduce risk (chance of loss). Since a mutual fund invests in different kinds of financial instruments, your chance of loss is lower than if you just invested in individual stocks alone.
I know that I've given you a lot to process in this one post, so let's take a break. In the next post, I'll give you an idea as to how you purchase and actually make money from the above instruments, as well as clarify any uncertain terms. If you have any questions, feel free to e-mail me at ISDiffer@gmail.com. In the meantime, you can check out the links on the right side of the page --------------------->
No comments:
Post a Comment