- Unless your investment is 100% guaranteed (like a Certificate of Deposit), you can lose the entire amount.
- Pigs get fed; Hogs get slaughtered. Don't get too greedy. High paying investments are very risky.
- Diversify to minimize risk.
- Consider a using a licensed, experienced Financial Adviser. Consider a using a licensed, experienced Financial Adviser.
- A 401K is always a great investment.
All You Need to Know
Mutual Funds are regulated by the Securities and Exchange Commission. Mutual funds have boards of directors that represent shareholders. The board is charged with ensuring that the best available managers are running the fund and that shareholders aren't overpaying for the managers' services.
If you are now concerned about what do with all of your excess money, congratulations! You've done well. You have thousands or tens of thousands or hundreds of thousands of dollars to invest.
Even if you only have thousands of dollars to invest each year, those thousands of dollars can grow over time to an amazing sum.
Or you could lose it all.
Here is a formula you need to remember: the higher the risk, the higher the return. The lower the risk, the lower the return.
For most people, investing is the art of managing risk. Are you willing to lose everything by shooting for a big payoff, or do you prefer to accumulate your money slowly and methodically? The reality is that most people are willing to accept a reasonable level of risk to achieve a reasonable level of return.
The definition of 'reasonable' is up to each individual investor.
One of the most common investments people make is in Mutual Funds. When you buy a mutual fund, you're actually buying an ownership stake in a corporation that hires a money manager to invest its money. The price of a single ownership stake in a fund is called its net asset value , or NAV. Invest $1,000 in a fund with an NAV of $118.74, for example, and you will get 8.42 shares. ($1,000 / $118.74 = 8.42.)
The fund manager combines your money with that of other investors just like you. Together, those investments are called the fund's assets. The fund manager invests the fund's assets by buying stocks, bonds, or a combination of the two. (There are more complicated products out there. Forget about them.)
The stocks or bonds purchased by the fund manager are referred to as a fund's "holdings," and all of a fund's holdings together are its "portfolio." A fund's type depends on the kinds of securities it holds. For example, a stock fund invests in stocks, while a small-company stock fund focuses on the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature.
Mutual funds offer some notable benefits to investors.
1. They don't demand large up-front investments.
2. They're easy to buy and sell.
3. They're regulated.
Still, mutual funds can have a downside. Some funds are very expensive and others perform poorly. But overall, mutual funds are good investments for people who don't have the money, time, or interest necessary to compile a collection of securities on their own.
The Stock Market
The Stock Market is considered to be "irrational," which sounds a lot like a mental illness. This is because it does not act rationally based on the earnings of particular company. A company may do very well, but its stock price goes down. Or a company may have no cash flow, no earnings and no assets to speak of, but its stock price goes up.
One reason is that the stock market is driven by supply and demand. If a lot of people want a stock, the price will go up. If a lot of people do not want a stock, the price will drop. Since people purchase stock based on irrational and emotional thinking, rise and fall of stocks is irrational and emotional.
And remember, every person who sells a share of a particular stock, believes it will go down. And every person who buys a share of that particular stock, thinks it will go up. Chances are one of them is wrong.
The main players in the stock market are the Exchanges. Exchanges are where the sellers are matched with buyers to facilitate trading and to help set the price of the shares. The primary exchanges are the Nasdaq, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and a few other regional exchanges like the American Stock Exchange and the Pacific Stock Exchange. Years ago, all of the trading was done through the traditional exchanges (like the NYSE, American and Pacific Exchanges) but now almost all of the trading is done through the Nasdaq, which uses ECNs and thousands of other firms with access to the Nasdaq to facilitate trading.
How stocks are valued.
Stocks have two types of valuations. One is a value created using some type of fundamental earnings analysis. In other words, the investor looks at the details of the company and determines if the stock is under-valued or over-valued.
The other was is dictated by the actual price of the stock, how it has changed over time, how it compares to similar stocks, and so on. Sort of like evaluating a particular horse at the race track. This why the stock market is often compared to gambling.
Over the long term, the stock market is driven by underlying economic, financial and global growth. But in the short run, the market is driven by simple greed and fear, which are dictated by human emotions.
Recommend ways to invest in the stock market.
•Don’t try to time the market. No one has ever found a legitimate way to determine its trends. •Use cost averaging. By buying stocks on a periodic basis (like once a paycheck, once a month or even once a year), you will always be buying at an average price. •Take taxes into account. When you buy stocks, try to hold them for more than one year so you get taxed at the long term capital gains rate. If you sell your stock before one year, you will be taxed at your ordinary income tax rate. •Invest as much as possible into tax-sheltered 401K, 403B and IRAs. By investing in tax deferred plans, you are able to invest money and not worry about the tax implications. •Diversify your investments. Don't just invest in stocks. It is better if you diversify your investments into other asset classes including real estate (a house), cash (savings account or CD) and maybe even bonds. That way, if one asset class really underperforms, you will have some exposure to the better performing assets.
When investing in the stock market, don't load up on just one or two stocks. Diversify your investments across many stocks. You are actually better off purchasing one or more mutual funds to ensure diversification.
What is a 401K?
A 401k is a company/employer sponsored retirement plan that allows you to take out a portion of the money you earn from your employer and save it in a retirement plan account. Any interest you earn is tax-deferred, which means you don't have to pay taxes on it until you withdraw it at the age of 65 or older. In most cases the employer also makes a contribution to your 401K plan, so the money can really grow. Types of investments available include mutual funds, stocks, bonds, money market instruments (both short and long term).
All About Saving Money, Borrowing Money, Managing Money & Avoiding Scams!
Can You Really Get Rich Quick, or Is It Just a Scam? Find out in this Cult Classic about the most notorious Pyramid Scheme of the 20th Century. Available in Paperback or Kindle on Amazon.com.