“You should invest! Start early!” Said the older and wise Troopers I trained under. As I walked into a downtown skyscraper to sign up for my work sponsored Deferred Compensation Plan (457b/401a) I thought to myself, you’re 21 years old, you know what you’re doing. First question the adviser asked me was “what is your risk tolerance?” Wait I can lose money? What exactly am I getting myself into again?
Now for some quick and boring basics. Simple investing starts with simple understanding.
Stocks (equities) are a share of ownership of a company. Take for instance a prominent midwest company John Deere (DE). If you buy shares in John Deere stock you own a very small piece of that company. As an owner of the stock you have claim to John Deere’s assets and earnings. You are now a shareholder! Stocks are bought and sold on the major stock exchanges, namely the major three:
- New York Stock Exchange (NYSE)
- National Association of Securities Dealers Automated Quotation System (Nasdaq)
- American Stock Exchange (AMEX) mostly ETFs exchanged here.
Bonds (fixed income securities) are debt or a loan however you want to think of them. Bonds generally come from corporations or governmental agencies. Bonds have a defined amount of time attached to them, along with a variable or fixed interest rate.
Stocks have shown over time to have steady growth while bonds have shown to be great for steady income. Although both have risk attached to them.
Mutual Funds pool money from many investors and invests in a set portfolio of stocks, bonds, and cash. Giving each individual an equal share of profits and losses. Mutual Funds give investors big and small extraordinary access to investment strategies and allocations.
Index Funds are a type of mutual fund that tries to track and match the performance of a benchmark. A benchmark is what you see CNBC showing how the stock market performed that business day such as the S&P 500. You will find very quickly that this is the BEST THING SINCE SLICED BREAD! You are not paying a financial adviser and manager to attempt to beat the market. More about this to follow.
Actively Manage Funds are a type of mutual fund that is managed by a company, individual, or group of people. The actively managed funds try to beat the benchmarks year to year and as I will point out, they do not get the job done! Actively managed funds are more expensive since you are paying for a brain trust to try and outperform the market.
Clear as mud? Good! Now for the fun stuff that will help you make an educated decision on where you should put your hard earned money!