Stocks



Stocks

When you buy stocks you usually do it through a Stock Broker, a human who you can see, talk on the phone with, or email, and who you tell you want to buy stocks or other secrurities through. The second way people buy stocks is through online brokerage firms, like E-Trade or Charles Schwab. Here you use their computer software to put an order in for stock of the company.

Stocks are literally a partial share in ownership of a company. You buy “shares” of stock either by putting up a total amount of money or buying a number of shares. One share of the Apple corportation would cost you about $600. Right now that’s the most expensive company in the world. Companies sell shares of stock to raise money for new products or investments, so when you buy that share of Apple, they’ll use the money to make the next Ipad. You hope that the next Ipad makes the Apple company more valuable, so your $600 share is now worth $650.

Stocks are easy to buy and sell, this makes them liquid; usually you can buy a stock or sell a stock in a day or two. Stocks, however, have more volatility to other securities, meaning they go up and down in value quite often. This means you can make or loose a lot of money in a short period of time. That being said, the volatility of a given company’s stocks depends on that company. Some small or new companies are extremely volatile; you will have a high risk, but a high reward potential. More established and larger companies usually have more stable stock values. For example, Wal-Mart stock has been between $50 and $80 a share for over 10 years.

Money Market Accounts

You can invest in a money market account at banks, financial consultants, or online brokerage firms. You are putting money in a bank or other financial institution that they will save as different kinds of money, meaning they might have US Dollars, Euro’s, and Canadian Dollars all at once.

Money market accounts usually have a minimum balance. The higher the minimum balance, the higher your interest rate. Still, even if you can afford to invest a lot of money in a Money Market account, your interest rate will like be very low but will also go up and down a bit. This is because there is almost no risk, you can be sure to get your money. Money markets are liquid too, you can get your money anytime you want.

Bonds

Bonds are loans that you give to a company or government. You can buy them at banks, through financial consultants, online brokerage firms, or even some government offices.

Bonds have a specified interest rate. In the classic “savings bond” you would buy $50 for $25 and in 10 years, your $25 would now be a bond worth $50. Bonds are secured by the FDIC, so there is no risk of loosing your money. That being said, because there is very little risk, your reward and interest rate will be low. Finally, bonds have low liquidity, you can only get your money with the bond’s time term is reached. They call a bond that’s ready to be cashed “mature.” Most bonds mature in longer periods of time, like 10 or 20 years, but you can find shorter term bonds. Usually, the longer the term and the more you invest, the higher your interest rate.

Certificates of Deposits (CDs.)

Certificates of deposit, commonly called CDs, are financial products that work a little like a savings account but with a much different timetable. You can buy them from banks and other financial institutions. CDs require an initial investment up front in the form of a lump-sum deposit. The amount of the deposit is then kept in the CD for a specific period of time. During that time, the owner of the CD can’t take the money out or add to the amount of money that is in it. The money remains in the CD throughout the term of the agreed time period.

The amount of interest that the CD generates is usually dependent on how long the time period is. The longer the time period is, the higher the interest rate will generally be. In most cases, there are tiers of interest rates that require specific month or year terms to earn a higher interest rate. That would mean that a three-month CD and a six-month CD might have the same interest rate but that a one-year CD might have a significantly higher one. The time period of a CD may be as long as 5 or 10 years or as short as a month or two.

Mutual Fund

A mutual fund is an investment in a company that buys and sells stocks and bonds in other companies. By combining your money with that of other investors, the managers of mutual fund can buy a wide variety of stocks and bonds. When you buy a mutual fund, you are buying a part ownership of the stocks or bonds owned by the investment company. The biggest advantage of investing this way is that you instantly have a diversified portfolio; your risk is spread out. There are in general two kinds: Managed and Indexed. Managed have human beings picking stocks, Indexes use computers to pick stocks based off of long established indexes like The Dow Jones Industrial Average.

Mutual funds vary widely in the size, cost, and risk of the fund. For example, some funds are made up of all stocks and are much riskier than a fund filled with stocks and bonds. Mutual fund companies are required by law to register reports and statements with the government. These companies do charge you in the form of an expense ratio which will be a % charged on how much you invest. The lower the better. Index funds have lower expense ratios than managed funds.

Like stocks, mutual funds are risky. But because they are made up of all different stuff, you have diversity. This means that if one part of the economy crashes, you probably wont be totally broke. So they are less risky than stock but do hold the potential of high rewards. They may be harder to sell, and have less liquidity.

There is one special flavor of managed funds called “target date funds.” These change the composition of investments as they approach a “target date.” These are designed to start out risky and aggressive when investors are young, but become less risky more conservative near the target date when investors are about to retire.

Exchanged Traded Funds

These are the new kids on the block of securities. They are like index mutual funds but are traded like stock. This means that you get all the advantages of a mutual fund, but have the liquidity of a regular stock. Like mutual funds, they come with expense ratios that you will be charged as a % of your investment.

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