I went to the Winsor School, a private school for girls, from 6th - 12th grade. It was an amazing, inspiring and expensive school which taught me a lot. It was at Winsor that I got my first introduction to investing.
We had to do a project in a 7th grade math class where each of us chose a stock to "invest" in and follow for a certain length of time. We had to check the stock exchange a certain number of times a week and record the ups and downs of our chosen stock. I thought I would be clever (in a pre-pubescent way) and chose Tampax as my stock. Women are always going to have periods so it seemed like a safe bet that Tampax would do well. And it did. Relatively. It stayed pretty consistent, but did not have the big ebbs and flows that the riskier stock investments of my classmates had. I learned how to watch a stock nonetheless.
My next encounter with investing was through the Total Money Makeover. (Y'all thought I was never going to get back to that book, didn't y'all?) Ramsey mentioned that once you've completed most of the baby steps (emergency fund, paying down debt, putting money in your retirement fund etc.) that you should consider investing as a way of building wealth. He briefly touched on investing in mutual funds and looking for funds that showed growth over ten years. While this book enlightened me on how to start my financial journey, it did not shed a lot of light on investing.
I decided to do some investigating of my own. I read Dave Ramsey's The Money Answer Book, which gave me the basics on investing, which led me to read more articles. While I didn't (and still don't) feel like I finally understood all there was to investing, it did make me feel confident in making some decisions on where my retirement fund was being invested. And my retirement fund grew based on the investments I made.
Despite my retirement investment success, I still have a very rudimentary knowledge of investing, so I have made it one of my year goals to learn more about something that has seemed like a black box for so long. I invite you all to share in this journey with me. I'll be posting more and more on investing as I learn more because sharing is caring, and I want us all to grow and invest and get financially fit together. As a starting point to this journey, below are some of the most common ways you can invest. I relied heavily on Investopedia (all are linked) because I want to ensure that what I am sharing is accurate and understandable.
Stocks are a a percentage of ownership in a company that entitles the owner of the stock that same percentage of the company's profit. Basically, if you own 10% of Starbucks in stocks, you receive 10% of Starbucks' profit. In order for companies to sell stocks to the general public, they must have gone through an IPO = initial public offering. Stocks are typically the most profitable investments, but they can also be riskier (which doesn't necessarily mean bad). Selling stocks helps companies to raise money to promote the expansion of their business, which in turn, means potentially more profit for stock holders. Stocks are also referred to as shares or equity.
Bonds are essentially loans with the investors in the role of lenders. We can purchase government or corporate bonds, which are traded publicly. The money that we pay for the bond goes toward financing new projects for the government or company. There are clear stipulations about how and when that money must be paid back to the purchaser of the bond, as well as what interest is charged. Once the bond reaches its maturity date, the purchaser of the bond gets back what they initially paid for the bond (the principal), plus all the interest they earned for lending the money in the first place.
Mutual Funds are a compilation of several different stocks, bonds, money market accounts etc. that create a central pool of money. Each mutual fund is managed professionally and typically has 100+ funds contributing to the central pool. When you invest in mutual funds, you buy "stock" in the mutual fund and get the stock's percentage worth of the profit. Mutual funds allow you to diversify your investment portfolio at a low cost.
Real Estate seems pretty self explanatory. You can invest by purchasing homes and then becoming a landlord/lady. Obviously this is more complicated in practice than in theory because you are in charge of finding/buying the property, keeping the property up, and dealing with the fun and interesting issues that come up as a landlord/lady; however, if done right, this is a lucrative and potentially less risky way of investing.
These are some of the four main ways you can invest, but there are others. I am most familiar with mutual funds and stocks as I have bought and sold both. In later posts, I'll walk through the intricacies of each of these, as well as some other investment jargon it would be good to know. And as I continue to read books on investing, I will post my book recommendations here. I am a big fan of reading as a way to learn about any new topic.
As always, you should use this blog as a starting point to do your own research. You've got to own being financially fit for yourself, and you do that by continuing to exercise your financial muscles and by educating yourself on the ways to achieve your financial goals. Investing may or may not be one of those goals, but you can't make an informed decision about it until you know more about it. Choosing not to invest should not be as a result of not understanding what it is or how to do it. I'm telling that to myself just like I'm telling that to you. Let's learn together. I'm excited to have you along for the ride!