Lets start with the investing basics. First, why should I invest?
You want to invest to create wealth and achieve your financial goals. This may include investing for retirement, recreation, kids education. You may want to achieve financial security or speculating to earn a handsome profit. I personally invest to accumulate wealth and achieve my financial goals. I also invest because it is so much fun!
Before you start investing it is important that you learn the investing basics, do your homework and make a goal of what you want to achieve.
Learning to invest can be almost like learning a new language. There are many new terms and concepts. So it is important to learn the investing basics before you get started. Your money is at stake so you want to make sure you know what you are doing. It is all too common that people decide to start investing and dive right in without take the time to understand what they are doing. And the results over the next 12 months is that they usually lose money making some easily avoidable mistakes.
This can be avoided by a little homework! With the foundation on investing basics I will provide on this site. For Free! You should be well on your way to achieve your financial goals.
There is a difference between investing and trading.. I will focus on investing. Lets differentiate between investing and trading before we move on. Researching a company or an asset and then buying it and holding it over a longer time period is called investing. Buying and selling stocks daily is called trading. I chose investing because I have more control of the outcome.
Investing basics and Stock market
Companies issue stocks which are pieces of paper representing ownership of the company, although today it is all digital numbers on a computer screen but I am sure you get the picture. Public companies, like Apple, Ford, Dell, etc, issue stocks to raise money when they need extra cash. The money is used for starting new projects, upgrading equipment, expanding business among other things. The companies need money to grow and expand so they offer you ownership of their company in exchange for your money. This is the purpose of the stock exchange in a nutshell.
The stocks issued are traded on a stock exchange. There are multiple stock exchanges but the two largest exchanges in the US are New York Stock Exchange (NYSE) and the Nasdaq. After the stocks have been issued they are traded (bought and sold) between private buyers and sellers. The company issuing the stock will not take it back after they have been issued. If you no longer want to own a stock you have to sell it to someone else at the current market price on the stock exchange.
Why do stocks go up in price? Stocks go up in price based on supply and demand. If a lot of people want to buy a particular stock it goes up in price. If people decide they no longer want a particular company its price goes down. It is that simple! The key is to buy before everyone else buys and drives up the price.
Investing Basics and the Bond Market
Bonds are another way for companies to raise money to start new projects and expand business. A bond is essentially a medium or long term loan where the owner receives a regular interest payment. At the end of the bond term the initial loan amount is paid back to the bond owner.
Bonds are also issued by countries, states, and counties. They are used to raise money, when taxes are not enough, to build new roads, bridges, schools, etc.
As a bond holder you are not an owner of the corporation or entity like you are as a stock holder. However, you do have a greater right to assets and an income as a bond holder in the case of bankruptcy. Bond holders get paid before stock holders during a bankruptcy.
Bonds are also traded. But unlike stocks there is often no centralized exchange like NYSE. In the US and most developed countries bonds are traded over-the-counter (OTC). The bond market is made up of private dealers that are providing liquidity to the market by offering to buy and sell bonds. This allows you to buy a bond without waiting for a new issuance or sell before the bonds maturity.
Bonds have different ratings. The ratings are issued by credit rating agencies like Moody's, Standard & Poor's, and Fitch Ratings. They rate the bonds according to quality or credit worthiness of the company. A government typically has a higher rating than most corporations.
Investing Basics and the Commodity market
Commodities like wheat, sugar, corn, copper, gold, etc are traded on a futures commodity exchange. Futures exchanges make it possible for these commodities to easily be bought and sold. The commodities bought and sold on the commodity exchange are called contracts. The contracts are standardized with a fixed amount of a particular commodity to make trading easy.
The original purpose of the futures exchange was to give industry an easy was to buy raw material. The futures exchange give industry the ability to buy commodities at current prices and take delivery of products in the future. This allows them for long term planning without having to worry about fluctuations in commodity prices.
The investors that buy and sell contracts to make money on the futures exchange also serve a vital role. Investors add liquidity to the market and make it possible to buy commodities anytime in the market without having to wait for a seller or a buyer to show up.
Chicago Mercantile Exchange (CME), Chicago Mercantile Exchange (CBOT), New York Mercantile Exchange (NYMEX) & COMEX are some of the larger commodity futures exchanges in the US.
More on investing basics
Investing Glossary - Investing can be confusing if you are just starting out. There are a lot of terms and concepts. I have a created an investing glossary with investing terms that are commonly used in investing articles and magazine.
Financial Statements Find out how to read financial statements. Part of doing your due diligence is to find out the financial health of the company you are planning to invest in. There are three financial documents you should make yourself familiar with, the income statement, balance sheet, and statement of cash flow.
How to Screen a Stock Look at three basic criterias before you invest in a company. Here is a systematic approach to screening out the roughs to find the diamond.
Diversification Diversification refers to spreading your risk around different stocks and asset groups. Find out why the really successful investors do not diversity despite it being promoted by investment advisors on Wall Street.