Note: I will be reposting some of my instagram content here. If you are a devout instagram follower/reader and feel like you are having deja vu, this could be why! Otherwise, enjoy.
What is investing?
Investing refers to putting money into something which is expected to produce value or grow in value.
For example, someone could invest in a farm with the expectation that each year the farm will produce value while also potentially grow in value if they ever were to sell it. However, in the case of this page, we will use the term ‘investing’ to most often refer to the purchasing of stocks and bonds. These assets are often grouped together in mutual funds or index funds with the desire of increasing performance and/or reducing risk.
Now, what are stocks?
Stocks (also called equity) represent a fractional piece of ownership of a company. Investors purchase these assets with the expectation that they will grow in value or produce value (like the farm) as they have historically. Although, it is important to note that with any investment past performance is no guarantee of future results.
Growth: To visualize an investor’s desired outcome, imagine that your stock is like a slice of pie. If that pie were to grow larger, your slice would be larger as well.
Dividends: Another way stocks produce value for investors is through paying dividends. To visualize this, imagine you are a part owner of a farm. They sell their harvest at the market. With some of that money, they may choose to buy a new tractor to make their operation more efficient. However, imagine there are leftover profits for which the farmer has no use. The farmer may choose to instead give you (an investor) some of that money. This payment would be like a dividend.
What are bonds?
Bonds are another very common type of investment. They are similar to stocks in the sense that investors purchase them so that their money grows. However, they differ because bonds represent a loan rather than a piece of a business. Bonds are often issued by corporations and governments. Bonds are fixed-income securities. Rather than an investor hoping that the value of their assets grow or produce value (such is the case for stocks) bonds are contractual agreements where the issuer agrees to pay out a certain interest rate.
We will discuss risk more in the future. Most bonds are often seen as less risky than other asset classes but certainly not without risk entirely.
Finally, what are mutual funds and index funds?
Both mutual funds and index funds are collections of investments. Investors put their money together to buy these assets. This is done with the goal of reducing risk through diversification and/or greater investment performance. Both Index funds and mutual funds have a cost associated with them. These costs are called fees and expense ratios.
Index funds are passively managed collections of stocks. Passively managed means that nobody is buying and selling stocks in these funds very often. With that, the cost of this investment is often very low in comparison to mutual funds. These funds reduce risk through the purchasing of many stocks. Commonly known indexes include the S&P 500 and Dow Jones 1000. These indexes often match but do not outperform the broader stock market.
Mutual funds are actively managed accounts with greater cost but often broader exposure to asset classes other than just stocks (for example bonds). A relatively small number of mutual funds have managed to average greater performance than the stock market.
(Source:https://www.investopedia.com/terms/b/bond.asp#:~:text=Bonds%20are%20fixed%2Dincome%20securities,principal%20must%20be%20paid%20back.)
Allow me to highlight some disclaimers regarding any discussion of investment in this post or on this page.
The information provided in this post is for educational purposes only and should not be considered financial or investment advice. I am not a financial advisor, and nothing in this post constitutes a recommendation to buy, sell, or hold any specific securities or investments. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Always do your own research or consult with a qualified financial professional before making any investment decisions.
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