Investing
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[edit] Investing In Your Future
Is Investing a foreign idea to you? For most people it is. It sounds complicated and time consuming. It also sounds like you need to have money before you can make money. How many times have you heard the saying "you gotta bet big to win big."? Probably a lot, and probably when you were in Las Vegas or Reno at the time. Investing may seem like gambling but they are in fact quite different.
[edit] The Truth About Investing
Making good choices when it comes to investing isn't always easy but with the right information you can make better decisions when putting your money to work for you.
Investing seems like gambling because most people don't understand the mechanics behind the stock market. Stocks seem to rise and fall on a whim and for no apparent reason. Wall Street is this big money machine that makes or breaks companies, right? Not exactly. The companies and traders on Wall Street all get the same news at the same time as you and I. In fact, it's illegal for anyone (aside from the company releasing news) to have any piece of information before anyone else does. This is called Insider Trading and it is very very illegal.
Gambling involves chance. Even the best poker players in the world have to rely on luck to get cards they can work with. You might think investors who bought stock in Yahoo in 1998 were lucky because in a short period of time the stock quadrupled in value. Or maybe you think people that bought Apple stock when the price was $45 got lucky because they just sold it for 3 times the value.
The truth is, they probably weren't lucky and they definitely wern't gambling. They probably just did some good research and realized they could make a bunch of money by purchasing a stock that was undervalued. We'll get to talking about value later.
So what is investing exactly?
Investing is the practice of stashing your money in a form that will give you more money in return. There are many ways to invest and this is why most people simply don't do it. It's all too much to choose from for most people so let's start with the simplest form of investing. Saving.
Savings Accounts
Why talk about saving? Saving money is the simplest form of investing but the hardest for people to control. The fact is people that only put money away into a savings account eventually dip into for one reason or another. New car, new bike, christmas is coming...any number of reasons can be justified for dipping into that savings account.
Why bother with a savings account? Simply put, you will earn interest on the money you keep in your savings account. Most basic savings accounts pay a 2% annual interest. So for every $1000.00 you have in your savings account, you are going to make $20.
That's not much is it? Then again, you wouldn't have that $20 if you hadn't saved to begin with...so it's a start.
There are better ways to invest in these types of accounts. High-Yield checking accounts pay anywhere from 4% to 6% annual which is much better than the typical 2%. You can also choose a CD (Cash Deposit) from a bank which will pay out a fixed interest for a fixed time. Usually these are anywhere form 6 months to 10 years. Again, you are freezing your cash for a specified time in order to make a guaranteed profit on your cash. The more money you invest in these accounts, the more you make when the time comes. So the real benefit here is a guaranteed payout.
Bonds
You may have heard the term "Stocks and Bonds" when talking about investing. Stocks and Bonds are actually two different types of investment vehicles. A Bond is a way of investing buy purchasing a debt. Bonds are how companies borrow money from the public. Bonds have fixed timelines and are also a guaranteed payout if you keep the bond to maturity (the date the bond matures and pays out). Not all bonds are created alike and there are many things to consider when purchasing bonds for investing. For more information on bonds, see Wikipedia[1].
Stocks
Stocks, equities, securities. These all refer to the same thing. Stocks are pieces of paper which represent an interest in the company that issues them. Stocks are issued as shares in a public company. These stocks have a value which is figured out initially during the Initial Public Offering (IPO). After the IPO, shares of a company trade on an exchange. The value of those shares is determined by public demand and rises or falls because of this demand. This is a simplified explanation of stocks but it gives you the basic idea.
[edit] Why Invest In Stocks
Earlier I mentioned the frequent association of gambling with playing on the stock market. The association is understandable but completely false.
Whereas gambling involves putting up money and hoping for a certain result, investing in stocks involves researching the company including their financial outlook, growth prospects, product pipelines, product demand, and where the current stock is priced at compared to how much it has earned called the Price to Earnings ratio (P/E).
Investing Guru Jim Cramer calls this doing your homework. He holds to the idea of "buy and homework" not "buy and hold".
Investing in stocks has proven to be a great way to invest because it forces you to be active in the process. When you research a company and decide that you are going to invest money, you are making a conscious decision to be involved in your money. Cramer suggests an hour a week of research per investment. This is completely reasonable.
What Do I Buy?
This is a question I get a lot. Friends and family always ask me what they should buy. These are usually beginning investors asking this question and my answer is always the same. Buy what you know. Buy what you eat, drink, wear or use.
Look around your house. I bet you easily have a dozen companies you could potentially invest in. Of those dozen, you should pick 5. Not just any 5 though. You want to be diversified. Pick one each from the following list.
- Financial
- Energy
- Technology
- Retail
- Speculative
These 5 categories are important because having one security in each category will protect you from volatility in the market and help protect from big swings in prices up or down. Having a well diversified portfolio is the cornerstone of investing in stocks.
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