A few smart investing decisions can mean the difference between eating chicken at Alain Ducasse (Paris, France) or McDonalds (Paris, Indiana). Below you'll find nuggets (thank you) of information that may not tell you where to invest in your money, but they may help you ask the right questions.
When you use someone else's money, you have to pay for it.
For example, when you make a deposit in a bank or financial institution, they use your money. They have to pay for it. They pay you interest.
When you borrow money to pay for college, you are using someone else's money. You have to pay for it. You pay your lender interest.
The "interest" you earn is the same kind of interest as the "interest" you pay (simple enough). So earning 5% in savings while paying 20% to your credit card isn't the smartest idea in the world (pay off that card).
Anytime you're not spending your money, your money is "sitting" somewhere. And whenever it's "sitting" somewhere, it should be working hard to make you extra money. You have enough lazy moochers in your life as it is.
When choosing where to put your money, consider two main things: how much you expect to "earn" and the chances of getting your money back.
For checking and savings accounts, you won't earn much, but you'll get your money back. You might be receiving some services with these accounts (like the ability to write checks), but you should still compare the rates on these investments to other alternatives.
"Free" checking accounts aren't really free if you don't earn any interest on your money. Remember: if someone uses your money, you should expect to get paid interest.
For CDs (certificates of deposit, not those round things you lose under the seats of your car), you may earn a little more interest than savings accounts and you'll get your money back, but your money is in prison for the term (length) of the CD (one year, two years, five years, etc.).
Banks and financial institutions may use words like "high-yield" and "premium" to sell investments. Instead of getting star-struck by these words, compare rates. Three percent is always bigger than two percent, even when two percent is "super!"
For money market funds, you'll usually earn more than savings accounts and get your money back, but these investments often require higher minimum balances and higher minimum check writing (often $250 or more).
Money market funds can occasionally be obtained in a bank, but they're more commonly available from mutual fund families. (Read on.)
A mutual fund is a whole bunch of stocks, bonds, and/or other investments packaged into a nice little bundle.
For example, the ABC Technology Fund may be a collection of a whole bunch of technology stocks. You'll never really know which stocks are in the fund at any given time because they're always changing.
When you buy a mutual fund, you are paying for someone else (a mutual fund manager) to make investment decisions for you. If your manager makes good decisions or bad decisions, you'll pay him either way.
Mutual funds use all sorts of lingo to sound sophisticated:
The fee for buying (a "front-end" load) or selling (a "back-end" load) a mutual fund. Look for "no-load funds" to avoid paying these fees.
A pay-as-you-go fee for owning a mutual fund. If a fund has a 2% ratio, you'll only pay 1% if you own the fund for half of a year.
A lengthy, boring description of a mutual fund that you should read (or pay someone smarter than you to read and explain) before buying.
Mutual funds comprised of companies that have large growth potential (usually more risky), like that three-week-old bread in your kitchen.
Mutual funds with established companies. They may not grow as quickly as growth funds, but they make periodic payments to you over time and typically aren't as risky.
Mutual funds with a mix of stocks and bonds.
Medicine for Boredom
Investing talk can be boring. Here's a joke to wake you back up:
A ham sandwich walks into a bar. The bartender says, "We don't serve food here."
Please don't forget to tip your waitress.
When you buy the stock of a company, you're actually buying part of that company. (Just don't expect to own the corner office with the nice view.) You own a small, small sliver. If you buy ten bazillion shares, you own a medium-sized sliver.
If the company does well, the stock will probably do well, and you'll be able to buy yourself a nice new watch. If the CEO of the company is a crook and robs the company dry, then you may have to sell your fillings at the local pawn shop to get your money back.
The purchase of stocks comes at the very real risk of losing very real money. Although stocks are often touted for their great returns over the long run, the long run can often be very, very, very long.
Buy low. Sell high.
Stock prices are largely driven by expectations. If you find a company that you feel is strong or weak, determine whether your opinions have already been factored into the price of the stock.
Many stocks actually go down on a great earnings report (every quarter, companies announce how things are going) because expectations of the company's earnings were even higher than what was reported.
Search for "online broker" to find a company that can help you buy and sell stocks (and mutual funds). Shop around as fees can vary significantly between companies.
Bonds are IOUs.
When a company (or government) needs a little extra money to buy new executive toilet seats made from rare dodo bones, it may choose to issue bonds (or IOUs) to get some cash.
The company needs to pay back this money with interest, but how much interest? The answer depends on how confident the buyers feel that they'll get their money back.
Let's say you want to buy some bonds (lend money) to earn interest. If you buy bonds from Uncle Sam (the US government), you should feel pretty good that you'll get your money back. But if you buy bonds from Acme Company who needs money for their new line of shower bug zappers, you may not feel as confident of seeing your money again.
In the above example, you (the market) may be willing to part with your money to earn 5% interest for bonds issued by Uncle Sam, but you may require 10% interest to buy bonds from Acme Company.
As an individual investor, you may not buy individual bonds very often, but bonds will often be part of many mutual funds.
Since it's difficult to explain how all stocks are doing at any given time, indexes are often used to provide a snapshot of the "general market." Below are a few examples of popular indexes.
Dow Jones Industrial Average:
A collection of 30 really big stocks, like IBM and ExxonMobil. If you've never heard of the Dow, then turn on the news.
A collection of over 3,000 companies (mostly technology companies); also a very useful word to play in Scrabble.
This index contains, um... 500 stocks and represents over 70% of all US-publicly traded companies.
The stocks in each index will change over time.
Bert had his heart broken while learning about the first rule of investing: beware of Nigerian princesses over email.
Date: April 9, 2010
Subject: I NEED TRUST AND URGENT REPLY
Your Attention To This Letter Below Is Been Required,
My name is Sanusi Lamido, the wife of late rich Nigerian prince business man died in a horrible plane accident. Then happiness opportunity because I inherited a total sum of 10 million US dollars.
Recently my doctor told me indoor that I am not going to last long very bad headache and I want to come to America in my final days and I contact you.
I seek financial help to gain passage to your country and marriage and you imminent rich but this must be authorized secret secret and your trust is happy till I Rest In Peace.
Please email me back and hoping to hear from you soon.
Wow, you must have seen my profile photo on Facebook. I think it's a really good picture, but I wasn't sure if many people noticed.
From your email, you sound very special and I would love to find a way to help you. I have about $50 saved up. How much do you need?
My urgent need is for your total sum of 10,000 US DOLLARS.
I couldn't help but notice a terseness in your response. If this is because I didn't bring up your late husband, I simply felt it was too early in our relationship to talk about past flames.
So let me apologize and start again. I'm very sorry to hear about your loss. It must have been very hard.
Regarding the money, it may take me a few years to save up $10,000. But if you wait for me, I will certainly wait for you.
Do not email me again.