The Basics of Investing (Stocks, Bonds, Mutual Funds, and Types of Interest)

Most people have heard that investing is the best way to accumulate wealth. Investment is the act of

redirecting resources from being consumed today so that they may create benefits in the future.

More precisely, investment is the use of assets to earn income or profit. The wealthiest individuals

in the world became wealthy through successful investment of their assets. Let’s go over the

basics regarding common ways that people invest. Stocks and bonds are two of the most common forms

of investment. A stock is a representation of ownership in a public company. They can

be risky to purchase as their prices can change dramatically and unpredictably, but often the

bigger the risk, the bigger the potential reward. There are two ways for stockholders to make money:

dividends and capital gains. Dividends are profits paid out four times a year to all

shareholders. The size of the dividend depends on the profit of the company. Capital gains are

when a stockholder simply sells their stock for more than they originally paid for it. If the

stockholder made a profit, it’s a capital gain. If they lost money, it’s a capital loss. A market

for buying and selling stock is called a stock exchange. Brokerage firms are businesses that

help stockholders trade stocks and sometimes even deal out stocks. These days, anyone can

easily access the stock exchange on their phone through apps that offer brokerage services.

A bond is essentially an IOU issued by a corporation or by some level of government.

When you buy a bond, you are loaning money in return for a guaranteed payout at a later

date. Bonds are usually a more stable investment than stocks. There are three components of bonds:

their coupon rate, maturity date, and par value amount. The coupon rate is

the interest rate that a bond issuer will pay to the bondholder. The time at which

payment to a bondholder is due is called the bond’s maturity. A bond’s par value,

assigned by whoever issues the bond, is the amount to be paid to the bondholder at maturity.

In order for investment to take place, an economy first must have a financial system,

which is the network of structures and mechanisms that allows the transfer of money between savers

and borrowers. As we learned in the previous tutorial, when people save their money,

they often are actually lending funds to others. Savers and borrowers may be linked directly

through what’s known as financial intermediaries. Financial intermediaries are institutions that

help move funds from savers to borrowers. They include banks, which we learned about

in the previous tutorial, but they also include mutual funds, hedge funds, and pension funds.

A mutual fund pools the savings of many individuals and invests this money in a variety

of stocks, bonds, and other financial assets. A hedge fund is a private investment organization

that employs risky strategies that can often make huge profits for investors. In general,

these investors already have tremendous wealth and are knowledgeable about investing.

A pension fund is income that some retirees receive after working a certain number of

years or reaching a certain age. In some cases, injuries may also qualify a working person for

certain pension benefits. Employers set up pension funds by collecting deposits, and

pension fund managers then invest those deposits in stocks, bonds, and other financial assets.

In general, the best way to invest your money is to put it in a diverse range of securities. This

reduces risk, especially when stock or bond prices drop. Therefore, people often invest