Jeremy Fulton, Financial Wellness Coach

Tag: invest

  • What is a Bond?

    Last week we answered the question, “What is a Stock”.  This week lets look at Bonds.  You’ve heard of them, I’m sure as an investment, “stocks and bonds.”  But what is it?

    A bond is considered a “debt investment.”  When you purchase a bond, you are loaning a company (issuer) your money.  It’s the opposite of your mortgage or auto loan; you make money off of them.  Though bonds rarely pay the same interest rate that you pay on your debt.

    Because a bond is a loan, it pays a fixed interest rate (coupon), usually every 6 months, and after the loaned money is paid back (on the maturity date).  Because they pay a fixed rate, they are also referred to as a type of fixed income security.

    Also because the payment is fixed/predicable, they are considered a lower risk investment than stocks (we’ve all heard stories of people loosing money in stocks).

    This lower risk comes at a price, though.  Bonds rarely have the earning potential of stocks or mutual funds (we’ll learn about mutual funds in a future post), and as such, having any significant amount of them in a portfolio can limit your ability to grow it for retirement (this is contrary to most financial advisors’ recommendations).

    The bond’s coupon is a function of credit quality of the company and the duration of the maturity.  You’ve probably heard of “junk” or high-yield bonds; when you invest in those, you are loaning a company money that may not be around long enough to pay you back, and as such, they pay the highest rates, whereas companies such as GE pay very low rates.

    It is possible to sell a bond before it’s maturity date; in fact, the first exchanges (think NYSE) were to buy/sell bonds!  The Venetians were exchanging them as far back as the 1300s!  In 1531 the first exchange was started in Antwerp, The Netherlands, long before stocks existed.

    An interesting fact you may not have thought about is that Savings Bonds are debt instruments of the US Government.  The national debt is nothing more than our government issuing bonds to pay for things that tax revenue doesn’t cover.  If you want to read a little bit more on bonds and bond markets, check out Investopedia .

    Well, what did you think of this article?  Do you have any questions or comments?  I’ll answer and address anything you post in the comments below:

  • What is a Stock?

    Stocks, bonds, Wall Street, investing, stock brokers, mutual funds, commodities, futures, options, and hedge funds; words we’ve all heard on the nightly news, TV shows, movies, and radio talk shows.  Do you really understand what they all mean, not just what popular culture says they are?  If not, you are in the majority of Americans.  Most people have never been taught much, if anything about them, and are content to grab bits and pieces of info from the news and political pundits, or maybe they just watched the movie “Wall Street.”

    But that’s not you; you are here trying to learn something, to expand your understanding of all things relating to Personal Finance.  Today I’ll do my best to explain a bit about Stocks.

    A stock is a share of ownership in a corporation.  The owner of a share of stock is a part owner of a company.  Yes, you can own (part of) Home Depot!  If a company has 100,000 shares of stock, each share represents 1/100,000 ownership of that company.  Most major corporations that are household names have many more than 100,000 shares; Home Depot has about 1.38 Billion!

    Because the stock represents ownership of a company, its value is based on the value of the company (I won’t go into stock valuation techniques here, it’s complicated enough to take a semester long college course to teach).  As the market values the company more or less (usually due to the company’s performance), the value of the stock increases or decreases, respectively.

    One way stock investors earn money is by the rise of the value of the stock (it’s ‘return’).  Another way is through dividends.  When a company makes a profit and decides to share it with it’s owners (stock owners), it pays out dividends.  The amount an investor receives is based on the number of shares he or she owns.

    That is basically what a stock is, pretty simple, right?  If you want to know a basic history of the stocks and the stock market, and what a stock market is, this short article on Investopedia.com  is written without a lot of industry jargon.

    Please let me know what you think of this post: was it too long, too short, too basic, too in-depth, etc.  Also, if you have any questions, post them below and I’ll respond with the answer!

  • Start Saving NOW! A story about Compound Interest

    You may think that you have plenty of time to save for retirement; after all, you are young and won’t retire for many decades!  Maybe you haven’t even given any thought to retirement and figure that you’ll worry about it later, maybe when you make more.  Or perhaps you are older and think it’s too late to save for the future, since it’s so close.

    What if I told you that money invested now is MUCH more valuable than money invested “later,” would you believe me?

    Let me introduce you to the term “Compound Interest.”  According to dictionary.com, compound interest is defined as, “interest paid on both the principal and on accrued interest.”  In simple terms it means that the money you earn on your investment (or savings) earns it’s own money.  Let’s use a simple example to illustrate:

    Suppose that our friend Bob has $100 to save.  He does his research and finds a savings account that pays 10% (yes, I know this isn’t a realistic number, but it makes the math easy, so bear with me).  He opens an account and deposits the $100.

    One year later, Bob opens his statement and sees that he now has $110 in his account!  His initial deposit earned $10. [$100×1.10=110]  Bob decides to leave his initial deposit and the earned interest alone for another year.

    The next year when he opens his statement, what does it say?  Does it say $120?  Nope!  It reads $121!  That extra dollar is due to compound interest; that $10 of interest he earned last year earned 10%, too. [$110×1.10=121]

    This happens year after year after year, each year’s interest earning interest during the following year.  If Bob left the $100, and it’s interest, alone for 40 years (i.e. age 30 to 70) he would have $4,525.93!  If he instead pulled out the $10 interest payment each year and put it in a cookie jar, he would have only $400 in that jar, to go with his $100 in the bank.  Pretty incredible, right?

    So now you are thinking, great example, but how do I apply this to my situation?  Great question, I’m glad you asked!

    Once you are out of debt and have an emergency fund saved up, start saving for retirement!  Some day you will retire, either by choice or due to health or a layoff.  Social Security will probably not pay enough (assuming it’s still there) to support you in your current lifestyle.  If you are young and start now, you should be able to retire comfortably.  If you are not so young, you need to start now so you have something to help you out.  Even a little bit invested now will help you out later.

    Now for your financial nerds out there, I know that savings accounts don’t earn anywhere near 10%; this a very basic example of how compound interest works.  Also, investments (stocks, bonds, mutual funds) don’t earn ‘interest’ but have a rate of return, which I’ll go into in much more detail in a later post, but the idea that any growth in your fund grows with the original investment still holds true.

    So, are you ready to start saving?