In the last post in this series, we introduced you to the wonderful world of investing, and today we’re going to expand on that by explaining some basic terms. A wise man once told me “investing without understanding the terminology is like wandering through the woods without a trail map; you get lost,” (thanks, Andy from GoalMine!) Not only can you get lost, but chances are, if you’re out in the woods without a map, you’re going to get brambles in your clothes, you’re going to get bitten by bugs, and you’re probably going to be eaten by a grizzly bear. Because that’s just what happens.
So before I stretch this metaphor even further, let’s talk stocks and bonds: the terms of investing! Knowing the terminology=having a map to guide you= not getting munched on by a metaphorical investment grizzly.
Just watch the video. And for more video fun explaining stocks and bonds, just click here.
Do you have any questions about the terms covered in this video? Comment below and we’ll get back to you with an answer!
1-STOCK: This is a word we’ve all heard before, but what exactly does it mean? A stock is a tiny piece of a company, so when you buy a company’s stock, you own a small part of the company. Each of these tiny pieces of the company is called a share, and when you buy shares in a company, there are 2 ways to make money:
1) The first is when the price of the stock, known as the share price, goes up. So let’s say you buy a share for $10, and the price of that share goes up to $12. You could then sell it for a $2 profit. Of course the key here, is that you’d have to sell it to make that profit. Think of it like owning a home. The price for the home can go up and down, but you won’t gain or lose anything until you actually sell it.
2) The second way to make money with stocks is called a dividend. This is when a company shares some of its profits with the people that own the company’s stock. But not all companies pay dividends, so if this sounds like something important to you, you’d better research it before buying shares.
2-BOND: Aside from stock, a “bond” is another type of investment. With a bond, you loan money to a company or government. It’s kind of like being the bank. Each bond lasts for a certain amount of time, known as the term of the bond. As the owner of the bond, you’ll receive interest payments until the term of the bond is reached, and then you’ll get back the money you loaned them.
3-MUTUAL FUND: Think of a mutual fund like a big bag full of different stocks and bonds that you can buy all together, like those assorted candy bags around Halloween. A lot of investors like these goody bags, I mean mutual funds, because they help them diversify, or own a small piece of a lot of different things. That way, if something bad happens to one item in the bag, you won’t lose that much money because there are so many other items. Mutual funds are a great way for someone to invest in a wide variety of stocks or bonds without needing to have a lot of money.
So to sum things up, stocks, bonds, and mutual funds are a few great investment vehicles, to guide you toward your goal of growing your money.
Come back next week, when we’ll talk about choosing the right combination of these to find the best balance for your investment portfolio.