Introduction: Investing provides an alternative income source to wages, but it comes with a series of risks. Properly done, investing can be one of the most powerful tools in your personal finance toolbox.
4.1 – Investing 101
In business the term “investing” can have many different meanings. A company can invest in a new factory to increase production, or a invest money in research to hopefully find a new, successful product. In personal finance, investing is the purchasing of securities in the hope of selling them later on for a profit. While the term “securities” can seem confusing, it represents a wide range of forms of investing such as stocks, mutual funds, and bonds. People invest as a way to supplement their income in the long term. Many retirement funds are made up of securities, as as the value of the securities increase, the value of the retirement fund increases. At the end of the day, the goal of investing is to sell your securities for more than you bought them, leading to a strong return on investment, or ROI.
4.2 – Stocks
The most well-known type of security are stocks. When you purchase a stock, you are purchasing ownership in a company. A company initially decides to “go public,” or offer stocks, in a Initial Public Offering, or IPO. In an IPO, a company agrees to sell a certain amount of ownership in their company in exchange for a pre-set price. This allows members of the general public to have ownership in companies.
Interestingly, after an IPO, companies do not make money off of their stock, and only care about their stock price to please their investors. If a stock price goes too low, investors, who have ownership in the company as a result of their shareholder status, will seek changes. Investopedia has a superb article on this, which you can read here.
Stock prices are dependent upon the concept of supply and demand. As demand for a stock goes up, so does the price. On the other hand, as more people are looking to sell a stock, the price goes down. This typically is directly effected by how the company is performing financially. If a company is doing well, more people want ownership, and the stock price goes up. In addition to the profit made from selling a stock at a higher price than one bought it at, profit can also be made off of stocks via dividends. A dividend is a portion of a company’s earnings that are distributed to the company’s shareholders. As Investopedia explains, offering a dividend may make a company’s stock look more appealing, driving up demand, and thus the stock price. All this keeps investors happy, and not desiring a change in leadership.
Just like with any other product, there needs to be a marketplace to buy and sell items. In the case of stocks, a stock exchange serves this purpose. There are numerous stock exchanges throughout the world, with companies typically listing in their home country, in addition to two major exchanges within the United States, the New York Stock Exchange (NYSE), and the NASDAQ. South Korean electronics manufacturer Samsung is listed on the Korea Exchange, while Apple is listed on the NASDAQ and Coca Cola is listed on the New York Stock Exchange.
When purchasing or selling stock, you must go through a middleman called a broker. Brokers are both available in person and online, and charge a commission for each transaction. When purchasing stock, you have two options, a market order, or a limit order. With a market order, you purchase the stock at whatever the current price is, while with a limit order your broker waits until a stock reaches a certain price to purchase it.
4.3 – Mutual Funds
4.4 – Bonds
4.5 – Investing Strategies
Resources and External Links:
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