We know you're undoubtedly dying to go out and buy that 50-inch plasma flat-screen HD TV. If you have the money, go ahead. But you know you should probably save some money, too.
You have a few choices: One choice is to keep your cash in your piggy bank (or tucked under your mattress). Another choice is to take it to the bank down the block, which is guaranteed by the federal government.
Not only is your money in this bank protected by FDIC insurance (up to a point), but it will grow in value as well.
So your $100 in that piggy bank will stay at exactly $100 — if your greedy friends or nosy kids don't get to it first. But at a real bank, a deposit of $100 will be worth about $104 at the end of the year. You'll be $4 better off, and your money will be guaranteed.
OK, fair enough. But what else is there to do? Because while $4 at the corner bank is nice, a bank that delivers a higher rate of return might be worth a look.
So in addition to banks, there are bonds, which some of us received as gifts for elementary-school graduation or first Communion. Calledbonds, notes, or T-bills, these are issued by the U.S. Treasury or corporations. When you give your money to a bank for safe-keeping, theyreturn a fixed amount.
But when you buy a bond, you give your money to the government, the state, or a company, and they agree to pay you back a fixed percentage.
These rates fluctuate, but you lock in your rate when you make the investment — sort of like signing a car loan. A month after you buy a car, you may be able to get a different loan rate, but you're locked in at where you signed on the dotted line.
Now, what if you had the opportunity to invest in a company, but instead of earning a predetermined return on your investment, your profit depended on how well (or how poorly) that company performed? Essentially, that's astock.
A stock is similar to a bond at the outset, as investors loan money to the companies. The key difference is that stock buyers don't know their return rate in advance, and there is no guarantee that they will even make a profit. Yes, the return could be higher than $4 — it could be $20, $40, or even $200.
Historically, the companies that make up the U.S. economy have earned about three percent higher than bonds.
But it could also be a negative return. Swing for the fences, and you sometimes strike out.
Three Facts to Wow Your Friends at a Party
1) The first publicly traded securities in the U.S. were $80 million in U.S. Government bondsthat were issued in 1790 to refinance Revolutionary War debt.
3) The first stock ticker was invented by Edward A. Calahan in 1867.
Shaken, Not Stocked
Turn on the TV and you'll likely run across someone yelling at you, gesturing wildly, and telling you which stock to buy or where to invest. Despite all of this badgering and hectoring, there is no such thing as the Midas touch.
The reality is this: It's not easy to make money. Period.
And it can be confusing, especially when you hear that you should invest some of your money in stocks and some in bonds.
Why? What's the difference?
Take a hard look at the 25-year chart above and read on about General Electric (GE), which offers both bonds and stocks. Let's take a look at what it would mean if you bought either one.
You know that buying a stock is like buying a small piece of the company, so if you bought GE stock and the company did really well, you would as well. As a part owner in the business, you would be entitled to some of those profits.
And assuming GE brought back the market average of an eight percent return, you'd do pretty well.
But then again, GE might have a bad year, in which case you won't get rewarded at all. The value of your shares might actually decrease.
If you bought GE bonds, however, you would know ahead of time what your return would be. Bonds have a fixed return, called the "coupon rate." Once they "mature," you get your money back and a little extra.
Owning a GE bond is kind of like offering the company a loan. You'll get the money back and some interest for your troubles, regardless of what happens with GE as a business. The thing is, you pay for that safety — bonds are more secure, but they offer less return (as the chart illustrates).
That is, unless the company goes under — then you could lose your money. That's why bonds are rated, with AAA being the highest rated and D being the lowest.
The higher the rating, the "safer" the bond is and the less likely you are to lose your money (theoretically speaking).
But let's not talk about bonds anymore — if you're on WeSeed, you're here for the stocks, right? You saw the chart and how, on average, stocks beat the pants off of bonds, right?
But it's always good to know what other options are out there, and now you know what you need to know about bonds.
So go out there and get your stock on!
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