Straightforward Investing Basics That Are Easy to Understand
- Stocks may increase or decrease in value after you purchase them.stock market analysis screenshot image by .shock from Fotolia.com
The world of investing often comes across as complex and difficult to understand, and many parts of it are. Trying to comprehend the differences among stocks, bonds, mutual funds, and why they matter, is enough to make a person's head spin. However, with a solid understanding of a few basic investment concepts, you'll be well on your way to grasping the more difficult ideas. - Investing can be described as a way to manage your money so that it grows over time. Instead of simply putting away small portions of your income, as you would if you were saving money, investment allows you to increase the amount of money you have based on the number of years you invest it. Investment is not a quick way to multiply your money. Rather, you reap the profits of the money you invest decades after you begin the process.
- Most people are familiar with the concept of money gaining interest over time. Nearly everyone has seen their savings account increase slightly each year based on their bank's interest rate. When that small increase is added to the previous amount, the savings account has a new, larger total, which will then earn more interest than the year before. Over time, the total of a savings account compounds, even if the individual does not make any more deposits. The same principle is true in investing. However, investment interest rates and rates of return are significantly higher than those of savings accounts, allowing the investor to earn a much higher profit off the money he invests.
- Because of the power of compounding, investments are nearly always the most successful when they are done over a long period of time. Therefore, it is wise to begin saving and investing as soon you receive your first paycheck. In fact, waiting just 10 years to begin $2,000 a year at 10 percent interest will decrease your profits by $200,000. Regardless of the type of investments you choose, it is always best to start as early as possible.
- Stocks are one form of investment. They represent ownership, or equity. When you purchase a stock, you are actually buying a small part of the company that sells the stock. The company's performance--whether good or bad--determines how much the stock is worth. While stock offers the highest potential rewards, investors may lose money if the company does poorly.
Bonds are a type of loan between the person buying the bond and the organization issuing the bond. They are a debt instrument. This "loan" is to be paid back, along with interest, by the end of the bond's term, which may be short or long. Unlike stocks, bonds that are kept to full term always make a profit. However, you can lose money if you sell a bond after interest rates have risen.
If you choose to purchase shares in a mutual fund, your money is combined with that of other shareholders and is then invested in a variety of stocks and bonds by a professional money manager. Mutual funds are relatively low-risk because they rely on a combination of companies and investment types. The profits from successful areas usually make up for any potential losses, making the overall investment profitable.
