Investing is not that hard, what most people think, however, there is a lot of specific jargon in this industry. First words, that come to mind are stocks and bonds. Let's figure it out, what are the key differences.
Shares are the purchase of property, and bonds are the purchase of debt
For most of us, fulfilling our dream of retirement is about investing money.. There are different types of investment, but stocks and bonds are two main instruments.
Generally, stock — это доля собственности в определенной компании. When a company goes public, how, for example Microsoft (NASDAQ: Microsoft Corporation [MSFT]), Google (NASDAQ: Alphabet Class C [GOOG]) or General Motors, she sells her shares to a wide range of people.
You buy a share, the company receives money to invest in business, and you, in its turn, a small share of ownership in the company. If the company is doing well, like Google in recent years, she makes a profit and the value of your shares grows. If the company is failing, like Volkswagen (XETRA: Volkswagen [VOW3]), your shares are getting cheaper (at worst, you will lose them altogether).
Certainly, if the company is doing well, you can expect, that shares will cost more. Now one Google paper costs more than $800, and Volkswagen paper is less than $150. These numbers have fluctuated over the years., depending on the financial performance of companies.
Besides, there is such a tool, like bonds. When you buy bonds, you, virtually, lend money to a company or the authorities of a country. Instead of investing in the company itself, you give her money, and she pays you to use them. This fee is called a "coupon" and is paid at a specific rate and schedule..
Besides, the bond has a maturity date, when the issuer (ie. company or authority, bond issuers, pay the amount, which they borrowed from you. You can also sell the bond before the maturity date. Depending on the level of interest rates, you will get more or less for it., which you paid when purchasing.
Since bonds, as we found out, more predictable, they are called "fixed income securities". Consider working with bonds on a simple example:
Допустим, you purchased a bond with par value $1000, купоном 8% and maturity in 10 years. This means, what will you get $80 ($1000*8%) interest paid per year within the next 10 years. Точнее, as most bonds are paid 2 once a year, you will receive 2 times by $40 during 10 years. Through 10 years, when is the maturity date of the bond, you will get $1000 обратно.
Stocks are considered a riskier instrument, than bonds
When you buy shares, your profit can be higher, if the company is doing well and your stock is going up. For example, in 2004 year you could have paid for a Google share $50. Three years later, it cost about $300. If you sold her then, your profit would be $250. Not bad already. However, if you could wait 2017 of the year, when this stock went up to $850, your profit would be $800.
Конечно, this generalization and stock returns will vary from company to company. To facilitate the selection, there is a reference index S&P500. Papers are included in it 500 largest US companies. The index may rise or fall, but in general, these companies have been performing well over the years, making long-term investments in them look low-risk.
Worth noting, that investing all the money in one company is a bad idea.
Most experts recommend investing in mutual funds and groups of investments in stocks of different companies.. If you are approaching retirement, you should invest more money in bonds and less in stocks, since you have no time for risk.
How much to invest in bonds and stocks?
Stocks and bonds will form the backbone of your portfolio, but what should be their shares? The answer depends on your age, investment goals and risk tolerance, but the general rule is:
110 - your age = share of stocks in the portfolio.
I.e, if you 30, you can invest 80% funds in shares, and 20% - in low-risk bonds. If you are more conservative, you can invest in bonds 30%. It's up to you, and some people think, that's too conservative, but this is a good starting point. As you get older, the ratio of stocks and bonds in the portfolio should be changed. The closer the pension, the more reliable your investment should be. If the price of the shares you bought falls, you may just not wait for the rebound.
Transfer: ru.insider.pro
