Investing — it’s a word you’ve heard thrown around before, probably from your parents, movies or TV.
But when you read financial advice about saving for retirement by investing or investing money to buy a house later in life, do you really know what investing is?
When you hear about investing, it’s most likely about investing in the stock market. But investing is a broad term that means many things.
Once you graduate from college and enter the “real world,” you have to make investment decisions, which is why now is a good time to learn the basics of investing.
The sooner you start investing the better, so you may want to apply this information now while you’re in college.
When I hear the term “investments,” the first thing I think of is the stock market. It’s the most common way to invest money.
The stock market is where you can buy ownership in a publicly traded company.
What that means is you buy a “share” from either someone else or the company itself. What the share represents is actual ownership of that company.
For instance, let’s say I buy one million shares of Apple. There are 5.82 billion shares of Apple on the market. With my one million shares, I now own 0.00017 percent of Apple.
So when you invest in stock, you are literally buying ownership in a company.
With ownership, you are entitled to vote on issues in the company, but it’s boring stuff like who will be elected to the board of directors.
What’s more exciting is you are also entitled to the profits the company makes.
The company can decide to take those profits and buy more machines to increase production, or it could give the profits to the owners in what is called a dividend.
While dividends can make you money, the real gains come from when you sell your stock.
The better a company does, the more people want to own it, and demand goes up, which makes the share price go up.
Hopefully, you bought your shares before this happened, and now you can sell them for a nice profit.
But most people don’t want to spend their time researching companies and analyzing their financial statements to decide if they are a good investment. This is where mutual funds come in.
A mutual fund functions like this: the more money you have to invest, the more opportunity there is to make money.
I could, with the proper licenses, start a mutual fund and ask every student of the University to give me money so I can invest it all for us. I take all that money and after a year, I have made a profit. You can then decide to cash out and I give you your share of the profits and the money you initially gave me.
Mutual funds are just an easier way to invest in the stock market.
Of course, there is always the potential you could lose money in the stock market. But that risk comes with the potential of getting higher returns than other investments, like a bond.
A bond is a loan you make to a government or a company. Bonds are usually less risky investments, but they also come with less profit.
When you buy a bond, you are giving money to a company so it can buy something to increase its business or to the government to fund its projects.
In return, they will pay you back in certain number of years, with some interest, or extra money.
The interest is based off the rating of the bond, which is a grade of how likely the government or company can afford to pay you back.
For example, buying a bond from the United States Treasury is one of the safest bonds you can buy. Because there is almost no risk, the interest rate will be low.
However, if a failing company needs to raise money they will issue a bond with a high interest rate because they have to pay you more to take on the increased risk.
Stocks and bonds are the two main investment vehicles you will deal with in your life, but there are a few other ways to invest.
You can buy real estate and hope the value of the land increases over time, or build a house and rent it out.
You can also trade foreign currencies and try to make money from the differing exchange rates.
In addition, you can buy commodities, such as gold, or collectibles, such as art, and hope their value increases.
Jay Cranford is a 20-year-old finance junior from St. Simons Island, Georgia. You can reach him on Twitter @hjcranford.