Investing: A Primer for BEGINNERS. Part 1
Everyone KNOWS they ought to be investing, but few
of us do it as we should.
Why not? Mostly fear. Fear of loss, fear of the
unknown. This series of articles is intended for people who are absolute
beginners at investing, people who might like to start
investing, but don't think they know enough about it.
We'll start from the very beginning.
I won't give you too much at once, and I won't let
it get too complex. I'll tell you about it as though I were
telling my mother, or perhaps an interested fifteen-year-old. I'll
assume you're reasonably intelligent, and hopefully, we'll have
some fun as well.
Deal? Okay, good. Let's get started.
What IS Investing, Anyway?
The best way of thinking about investing is that
someone is paying you to rent your money.
All kinds of businesses (and individuals!) need
money. Even the U.S. government rents money from us
Basically, they are borrowing your money, and when
they give it back to you, they pay you a rental fee, which we call
When you invest your money, you are loaning a
person or a business your money, so your chances of getting your
money back when you want it, and how much interest you're going to
earn, depends pretty much on the reliability of whoever you lend
Some people, companies, and governments are
extremely reliable, and some are not. You have to pretty much
decide on your own how much you trust whoever you're investing
Investing Law #1
David's Investing Law #1 is
Higher Reward Usually Means Higher Risk
Higher Risk Usually Means Higher Reward
There are a number of highly academic definitions
of risk, but it's really just what it sounds like. Investment
advisors will tell you to look at such things as company
management, longevity, price-to-earnings ration, and all that, but
mostly common sense will do.
What Is "Rate Of Return" on
The way you measure the success of your investment
is how much money you make from it. Your "return" is
The rate of return is generally given in a
percentage that you would earn, if you kept that investment
for an entire year.
For example, if you invested $100 for a year, and
at the end of the year you had $112, then you would have a 12%
rate of return. If you invested $100 for six months, and at the
end of that time you had $106, that would still be a 12% (annual)
rate of return.
Well, maybe. Sometimes investments are shown as
total return over a period. In the above example, turning $100
into $106 in six months (or any period) would be a straight 6%
increase. This is important to know because many investments give
you a "Performance over time" measure, such as
Looking at this (not a real) investment, you can
see it's done rather well over the last year, but in the last
month, particularly in the last week, it's not done so well.
We'll take a closer look at what all these numbers
might mean in a later part in the series, but for now, you can see
there is some interesting information we can find out about
Types Of Investments
There are an almost infinite number of investment
types, but among the most popular are the following, along with
some comments about the risk and return available for each.
Type of Investment
||This is one of the safest (read -
least risky), and as David's Investing Law #1 says,
one of the lowest returns. You can generally count on
getting something less than the bank's "prime
rate." As I write this (mid 2006), savings accounts are
earning around 3% interest. If you use a savings account, be
sure it is insured by the FDIC.
|Certificate Of Deposit (CD)
||These are also quite safe,
depending on where you purchase them. CDs from banks or
reputable investment advisors are probably totally safe. CDs
come in various lengths of time, usually from 3 months up to
10 years. The shorter CDs have smaller rates of return,
longer CDs have higher returns. As of this writing, you can
expect about 4.5 to 5% return on a 5-year CD.
|U.S. Government Savings Bond
||These are about as safe as the
U.S. Government. They also have a low rate of return, and
it's difficult to redeem them before their maturity
||These are about as safe as the
corporation that issues them. They are for specific periods
of time and for specific rates of return. If you are a
beginning investor, these might be a bit complex for you.
||These are treasury notes issued
by the U.S. government. They are long term, as in 15 to 30
years, and that's about as much as I know about them.
||The lifeblood of the U.S.
economy, and pretty much any first world economy, is
business. Business is conducted by corporations.
Corporations usually get their startup and initial operating
capital from selling stock, or shares in the company. Once
the company sells the stock, people trade it back and forth,
and the price fluctuates. Some stocks are risky, some are
safe. Some are low yield (return), and some are high yield.
We'll do more on this in a later part.
||Mutual Funds are nothing more
than organizations that pool money from lots of people to
purchase groups of stocks. A paid fund manager decides which
stocks to buy and sell. Mutual funds are generally (but not
always) safer than any individual stock, because any given
fund will own a number of different stocks, and if any one
of them crashes, it doesn't wipe out the fund.
Interestingly, there are more mutual funds today than there
are stocks to invest in.
||Commodities are the investments
with the highest risk by far, but also the highest potential
for return. Commodities are really contracts for the future
purchase (or sale) of such things as sugar, coffee, unleaded
gasoline, precious metals, or cotton. We'll cover
commodities in one of the later parts of this series.
That's enough for now. In the next part, we'll get into some
various investing strategies.
If you'd like to ask me a question, please use the Snicko
contact page. I read them all, and I'll try to answer the most
pertinent ones in this series of articles.
Take care, and God Bless,