Lesson 2.04: What is Stock Anyway?

Step 1: Long Term Investments

1.       Stocks
a. Stocks is when you invest your money in a certain company and buy a particular amount of shares of the company.  Depending on how well the company is doing and how many shares you have in the company, the amount of money you receive (dividend) will vary.  This is an aggressive investment, but can be worth it in the long run if the company does well. 

b. The expected benefits of this type of investment are that you will receive a dividend, or profit payout, from the company.  This money is some of the earnings that they have made, but seeing that you own a portion of the company, you are entitled to a portion of the earnings.  This potentially earns money because if a lot of people are interested in the company and it makes a lot of money, you will receive more money than with a company doing poorly or just starting out.

c. There can be a high risk that you will lose money when investing in stocks.  If the company goes bankrupt, goes out of business, is doing poorly, or not that many people are interested in it, you could lose the money that you initially invested into the company.  There could also be a chance that you invest money in the company and are not guaranteed a dividend, whether the company is doing well or not.  This is why this type of investment is such a high risk.    

d. The type of business where I could choose to invest this money is a company that is currently doing very well, is popular, and is a public company (meaning that you are able to buy shares in the company).  A business that I would consider pursuing might be Wal-Mart or Target.  These are large, nation-wide companies that are currently doing well and have the potential to earn a high dividend off of them. 

        2.  Bond
              a.  Purchasing a bond means you are giving a loan to a company.  This requires a minimum amount of money to purchase and a minimum length of time required to hold onto the bond.  This is a moderate investment because it is similar to stocks, but safer in the sense that you are not taking as high of a risk with this particular investment. 

               b. A type of bond that investors are interested in is high-yield bonds.  The benefit of these types of bonds are being able to enhance your current income, security if the company happens to fail or lose money, and they can help you diversify your portfolio and investments across different areas of the financial market.  This way, you are taking a risk, but there are also some aspects that keep you secure in certain situations. 

                c. Seeing that this type of investment is a moderate investment, there can be a chance that you might lose some money in the process.  However, there is not as high of a chance of losing your money with bonds as there is with more aggressive investments, such as stocks.  As with any investment that you make, there can be a chance that money will be lost, but by taking these chances, you could end up with more money. 

                 d. The type of business that I would choose to invest this money in is a company that is doing well and one that also allows people to buy shares of the company.  This way, the company is following the stock market and the amount of money someone will receive from their share is equivalent to the amount that you could receive from a bond.  The difference between a bond and stocks is that the company has to give you some of their money if you have a bond with them.  Sometimes, people are not guaranteed their money if they have shares in the company. 

3.  CD
     a.  A CD is a saving account for a specified time period.  With this investment, you will earn more money than traditional savings.  This is a conservative investment because it is safe and there is not much risk involved. 

      b. Benefits of this type of investment are that you will earn more money than traditional savings, it requires a minimum amount of money to invest, and it is a safe way to save money.  By putting this money away, you will have it when the specific time period is up.  This is a very secure form of investing.  Conservative investing can be just as effective as aggressive investing, without all of the risk involved.    

      c. This is a low-risk form of investing, but there is still a chance that you could lose money in the process.  If you were to try to take money out of your CD earlier than planned, you could get charged, meaning that you would lose money.   It is a good way to save money, but if you needed it, it is very hard to get out. 

      d. A business where you would make this type of investment is a reliable and safe bank.  After doing some research on banks and which one might be the best one for you to create a CD with, you can bring your minimum amount that you want in the CD.  Each bank is different, so there may be certain fees required.  It might also be better to have your CD in a different bank than your regular checking and savings accounts.  That way, you are diversifying your investments so you will always have money saved somewhere.    

Step Two:
                It would be better to invest my $25,000 in all three of the options above instead of investing it in one place.  Being able to experience all of these types of investments can give you an idea of which form is better for you and the amount of money you make.  It is also good to diversify your investments so that if a company loses money or goes out of business, you will still have money somewhere else.  This gives you the security of knowing that you will have a back-up plan in the event of a worst-case scenario.  Diversification is important because it can help lower the risk of losing money.  All three of my investment choices are different; one being conservative, one aggressive, and one moderate.  Knowing the risks involved in any investment can make you a smart investor and help you earn more money along the way.