After much time spent on research and compulsive head scratching to the point of hurting ourselves we would like to make it official that investing can’t be characterized as an honest toil. It’s not something you go to school or enter an apprenticeship for. In short, investing is not a career. Indeed, how many parents are nagging their kids to start investing ASAP? Not many.
Usually, when your teenage days are behind you and you’re just about ready to face the world, the parents’ mantra goes something like “beef up your savings account and stop ruining your credit”. All true, but there a few more bits of wisdom we thought we’d dawn on you before you’re fully entrusted with your own purse.
1. You need to know the difference between saving and investing. However obvious that sounds, savings are usually not invested. Your savings account is mostly money-keeping service your bank provides for a small fee and with minuscule returns. However, IRA or 401K money are reinvested on regular basis and are considered a somewhat popular way of insuring a pension.
2. The beauty part about having a savings account is that it helps you deal with inflation. In fact, having a bank manage your cash is probably the only sure way to keep up with inflation (3.89% as of late 2016) since the rate a bank promises in return and the rate of inflation are comparable in most cases.
3. You need to upgrade your vocabulary and allow a few new entries in it. The financial instruments such as bonds you gammy gives you for your birthday each year, stocks or CDs are called “securities”. There a basically two kinds of securities: debt securities allow you to, in time, collect the money owed to you (for instance, by government: when you purchase a bond you loan your government money hoping that the Treasury will pay you back with interest). Equity security, on the other hand, is something you own outright, an item of quantifiable value (stocks). The increase or decrease of this value can be accurately measured in market terms (price of stock). Here’s another new word for you: diversification. Means, putting your money instead of the one, in several nifty baskets. Here’s another one: ROI - “return on investment”. Until you actually put together an investment portfolio, it’s probably a bit too early to talk about this one but you can easily calculate your ROI by dividing your gains by your costs.
4. Stock exchange is the place, you guessed it, where stocks are sold or bought, in other words traded. The New York Stock Exchange (NYSE), the Nasdaq are the two you should remember to monitor as often as you can if you want to lead the exciting life of a commodities trader. Although, for simply monitoring stock prices there are indices like S&P500 and Dow Jones. Those are the major ones.
Get ready to pay fees to whomever is going to manage your portfolio for you - it ain’t free. Whether it’d be an online platform such as xStation or a professional portfolio manager, there may be either a flat rate - a one-time fee for all services, or a commission. Commissions may be structured differently from organization to organization, so research the heck out of the subject and think thrice before committing. More in part 2