Feb. 27, 2023
Investing 101 - Getting started for beginners
Investing basics online reading:
Online resources for beginners
www.nerdwallet.com How to Invest in Stocks
www.investopedia.com How to Invest in Stocks: A Beginner’s Guide
www.fidelity.com How to Start Investing
www.bankrate.com Stock market basics: 9 tips for beginners
www.wife.org Investing and Saving
Investing basics books:
“The Women’s Simple Guide to Investing” by Elinor Davison
Motley Fool’s Investment Guide by Tom and David Gardner
“Smart Women Smart Money Smart Life” by Julia Anderson
“One Up on Wall Street,” by Peter Lynch
“A Random Walk Down Wall Street,” by Burton Malkiel
BY JULIA ANDERSON
It is one thing to save but another to invest.
Investing, however, is the only way you will accumulate enough “wealth” to have a comfortable retirement. With markets down (spring 2023) because of rising interest rates, now is the time to become an investor.
Let’s take baby steps with the basics:
What is a company?
A company is a business organization that makes money by selling goods or services. Companies can be public or private.
What is a stock?
Also known as equities or shares. If you buy a stock or a share you are buying a piece of a company. The company issues shares or stock to raise money. Shares go up and down in value depending on how the company’s business is performing. Prices go up if people want to buy more shares and down if more people want to sell the stock. It’s about supply and demand and business performance.
What is the stock market?
The stock market is a basket of stocks offered for trade in a public marketplace. Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock. By listing shares for sale on stock exchanges, companies get access to the capital they need to operate and expand their businesses without having to take on debt. In the U.S. there are accounting rules for how companies operate and report earnings and distribute income.
What is a dividend?
A dividend is a reward paid to shareholders for their investment in a company's stock. A dividend usually originates from the company's net profits and is usually paid to shareholders every three months or quarters. A dividend is paid per share of stock, approved by a company board of directors.
What is compound investing?
Compounding is a powerful investing concept. It means earning returns on both your original investment and on payouts that are reinvested in more shares of the company or mutual fund.
You continue to receive returns (dividends) if you own the stock. For compounding to work, you must reinvest your returns back into more stock allowing your investment to grow.
Time is on the side of long-term investors.
Example: You start investing in U.S markets at $100 a month while in your 20s. Your average positive return is 12 percent annually, compounded for 40 years. You end up with a $1.17 million nest egg.
A friend, however, doesn’t begin investing until 30 years later at a rate of $1,000 a month for 10 years, averaging the same positive return. The friend will have just $230,000 in savings for retirement at 65. It is essential to get STARTED EARLY.
What does history tell us about American stock markets?
History shows us that stock markets are cyclical with repeated patterns of highs and lows. American stock markets have been around since the late 1700s and early 1800s. From 1871 until 2022, U.S. stocks have increased at 4.6 percent a year in value EXCLUDING dividends. If you add in dividend reinvestment, markets have grown annually about 9.1 percent a year.
What is inflation?
Inflation is the rate of increase in prices of a basketful of consumer goods over time. Inflation eats into savings and incomes by decreasing the purchasing power of money. To cool off inflation (rising prices), the Federal Reserve Bank raises lending interest rates to slow the economy. Ideally inflation runs at about 2 percent a year.
What is a mutual fund?
Mutual funds let you pool money with other investors to mutually buy stocks, bonds, and other investments. They are run by professional money managers who decide which securities (stocks, bonds etc.) to buy and when to sell them. Those are actively traded funds and usually have a higher management fee.
Other “index” mutual funds are passive funds that just follow a group of stocks up and down based on the performance of those stocks or bonds etc. Fees are lower because management is minimal.
What is a bond?
A bond is simply when you buy part of a debt. A bond is a loan made to a company or a government that can be traded on the stock market. Examples are bonds issued by school districts to build a new school building or a bond issued by a city or port district to build a road or a new warehouse. Investing in bonds is a more conservative way to invest your money:
You usually invest your money for a limited amount of time.
When the loan (bond) expires you receive back the initial amount you invested. Plus, you receive interest income on the investment.
WARNING: When interest rates are going up as they did in 2022, the value of a bond fund typically goes down. That is because no one wants to buy a bond paying a lower interest rate when they can buy a new bond with a higher interest rate.
The difference between stock shares and bonds? Bonds raise money via debt, stock shares raise money by giving investors a stake in the company’s business operation. Investors are rewarded with dividends.
Bonds pay interest. Bonds are offered with a time window, typically six months, nine months, a year, two years. You know when they will “come due.” Shares pay dividends that continue until you sell the shares or the company board of directors changes the dividend payout.
What is an EXPENSE RATIO?
An expense ratio measures how much of a fund’s assets are used for administrative and other operating costs. An expense ratio is calculated as a percent of your fund assets. Operating expenses reduce the fund’s assets, thereby reducing the return to investors over time. It can be a big factor in how much you can save and invest for retirement over time.
Fidelity’s Contrafund is actively managed and has an expense ratio of 0.86 percent. That means for every $10,000 invested in the fund, Fidelity charges $86 dollars a year.
Vanguard has a passively managed fund that replicates the S&P 500. No one is managing this fund which just goes up and down with the shares in the S&P 500. The expense ratio on this fund is 0.03 percent, which means Vanguard charges just $3 per year.
Ideally, investors are looking for funds that charge 1 percent or less per year.
Is NOW (spring 2023) a good time to invest?
Yes, especially if you are young. Start now, stick with a plan. Ignore short-term market gyrations. Put as much as you can into deferred tax plans such as a 401(k), Individual Retirement Account or a Roth Individual Retirement Account – LET THE EARNINGS REINVEST OVER TIME TO BUILD A NEST EGG.
But let’s be REAL. With rising interest rates because of inflation, we may be in for slower U.S. and global economic growth, ups and downs in stock markets and more complicated challenges for investors. Ignore all this.
Why do we need to invest, not just save?
It is one thing to SAVE MONEY and another thing to INVEST MONEY. You can save money out of your paycheck, put it in a savings account at the bank for a rainy day. Investing requires more than that.
To have enough money to retire comfortably you will need to be not just a SAVER, but an INVESTOR. That means putting your long-term savings in U.S. stocks and bonds and bank certificates that will generate income over time. The earnings from those investments must be reinvested in a tax-deferred account…. usually through a workplace savings plan like a 401k or on your own with an Individual Retirement Account or Roth Individual Retirement Account.
Over 25 or 30 years the compound reinvested earnings will build a retirement NEST EGG. The sooner you get started investing and reinvesting those earnings, the better. Don’t wait until your 30s or 40s. That makes it so much harder to get where you need to be financially.
In recent Smart Money YouTube episodes, we have covered the basics. Click here.
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