Investing for beginners
Stocks and Bonds
Why does investing seem so complicated?
The number of ways you can invest is mind-boggling. The worst part is the fact that investment world uses a different terminology. If you are new to investing it won't be long before you encounter words like accretion, moving averages,amortization,average weighted price, open interest, futures and option, book closure etc. Allow me to stop before I place you to sleep. All you actually want to do is to place your money in something where it's going to be safe and grow. Is that too much to ask for?
What makes there so many different investing alternatives?
Is it really different! Have you ever been to a supermarket you will see boxes of detergents, most of which will be labeled new! Improved! or even better New and Improved! But it doesn't matter what they call it, when its all said and done these boxes are filled up with nothing more than SOAP, comparable to they have always been.
Investments are not any different. At first glance it may appear that all these mutual funds, unit trust, REIT's, options, futures are unique and need encyclopedic knowledge to understand the technicalities. But usually what you are looking at are few things more than just an old method of investing in a new box.
Understanding buying simple terms:
In a family tree you will have a male and a female at the surface of the list from where other branches came out. Similarly in investments towards the top you have stock and bond. All the forms of investments are a couple of form or other of the. And their differences might be spotted just as easily since you can distinguish a man from your woman.
What are stocks and bonds and what is the difference backward and forward?
I will compare stocks into a racing car; all powerful snazzy, attractive, dangerous, accident prone and bonds towards the family car; nothing much to look at, slow, always walks you where you are going, always there for you.
Some basic traits of the:
People investing in stocks want to see a return on their money, bond holders intend to make sure the return of these money.
Stocks are about taking risk and bonds are about avoiding risk.
Stocks offer unlimited upside potential, bonds offer limited downside potential.
Stocks mean ownership and bonds denote loaning. And then we can say one is an ownership investment and yet another is a loan investment.
The real difference between an ownership investment and a loan investment isn't too hard to understand. The differences are obvious knowing what to look for.
An ownership investment doesn't need an ending date. (When you buy a stock it never becomes due, you must sell it to get cash)
Loan investments almost always have a due date (e.g. your fixed deposits together with the bank)
Ownership investments rarely promise a particular return. A stock price can move up 10 times or remain static for decades.
Loan investments often promise a fixed return. A six month deposit certificate promises 4% return.
Third major distinction is if you will get your money back.
In ownership investment there can be no such guaranty. A stock's price can visit zero.
The loan investments usually are backed by the guaranty with the bank or the government.
With all the above distinctions in mind try to figure out what you happen to be invested in.
Few examples: your bank checking account or Government bonds: loan investment
stock or mutual fund: ownership investment
What can i invest in?
Having an excessive amount of investment in one type can be bad for the investor. Loan investments can't seem to keep pace with inflation, you may have your money safe nevertheless the purchasing power goes down. Too much risk avoidance can result in less return. Similarly Ownership investments can leave you without a penny in your pocket. Idea would be to keep a balance between the two. Neither is in a group of good or bad or one superior to the other investment rather they serve different needs. Needs which can vary from one person to the other depending on ones investment time horizon and risk appetite. Stocks and bonds complement each other.
If you're new to investing first look at the risk appetite, needs and time horizon of investments to determine where you should put your money. Chance to find the that you read more about stocks, mutual funds and bonds in following articles.