Investing is a complicated topic that is not very beginner-friendly with its constant use of acronyms and terms that only Wall Street analysts would understand. Most financial experts would love to make students believe that managing their money is a complicated science that is extremely difficult to understand. However, this is hardly the case.
Anyone with a desire to start investing can do so from the comfort of their home, provided they have a bank account, funds to invest with and patience.
Stocks and bonds are the forerunners in the financial world, so it is important to grasp a basic understanding of these concepts before investing.
First, it is important to understand what a brokerage has to do with any of this. Brokerages, such as Robinhood or TD Ameritrade, act as the middlemen between you and your investment, providing you with the ability to buy and sell a stock or bond. Brokers may also charge a commission fee for stocks and/or bonds. Commission fees vary from $0 a trade to $6.95. It is important to note that these fees are applied both when buying and selling, so make sure you have the funds to cover these costs.
When buying a stock, you are actually buying shares, or pieces, of that company. There is no limit to the number of shares you can buy except the amount of money you have to invest. The more shares of a company you own, the more you can stand to gain or lose.
Stocks are arguably the easiest to buy as they can be done with a simple mouse click or finger swipe through online brokers. Once you find a company that you can afford, you can put out a buy order and it will be completed at whatever price the stock is trading at.
For example, Snapchat’s stock, written as $SNAP, is at $8.48 as of Sept. 30. If you send out a buy order for one share, you will have one share of Snapchat at $8.48. If you buy five shares, you will have five shares of Snapchat each at $8.48 for a total price of $42.40.
Stocks are easy to sell and the process is similar to buying, just with a sell order instead of a buy order. You can sell any number of shares that you own at any time along with no obligation to hold them for a long time. However, you do get the benefit of a better tax treatment for holding stocks for longer than one year.
Generally, it is better to buy stocks when the market is going up. You would want to buy while prices are rising and sell when the market is starting to decline. However, buying and holding stocks for a long period can cause headaches, since you will always be worrying if the stock market is up or down. If you ever feel uncomfortable holding onto a stock, save yourself the headache and just sell it.
Aside from stocks, another way to invest is through bonds. Bonds are not buying into a company but rather buying a company’s debt. Companies or government agencies that need to raise money sell bonds and allow investors to buy these bonds. The promise is that they will be repaid with interest in the future; therefore, making them in debt to you.
Bonds have a set rate at which they will grow, but unlike stocks, it is guaranteed that the investors will get back their money back plus their interest rate. The only exception being that a company goes bankrupt and is unable to pay its debts back.
Unlike how you can sell a stock at any time, the length of a bond is unchanging and generally does not allow the owner to sell it early. Once your money is put into a bond, you will not get it back until it expires. Selling a bond early will result in a penalty of varying amounts depending on the bond.
Bonds are bought through brokers, the Treasury Direct website or most commonly through a bank. Bonds are a bit more involved and require you to hold cash for a specific amount of time, anywhere between a few months to over 30 years. Because of this, you need to make sure you are comfortable with committing for that amount of time.
The prices for bonds can range from $1,000 to over $50,000. While bonds are nearly guaranteed to pay back investors, it typically takes longer amounts of time to see any profit, unlike stocks.
Whether or not you invest in stocks or bonds now, it is important to understand the difference. You never know if one day you will decide to start investing, or even want to work on Wall Street.