I don’t own any stocks or bonds, but I am starting to get the feeling that letting my money sit in the bank is not the wisest decision. I have never been exposed to the culture of investing, and have no idea what I’m doing. I can’t even find a simple resource for defining all the terminology I’m seeing, and reading the descriptions of different funds on Vanguard’s site is making my head hurt.
Seriously, I’m new. My parents grew up in a trailer park and a farm. Nobody in my family has ever graduated from college. Nobody in my family has ever owned a stock or a bond. I don’t even know the first place to look for advice or instructions or explanations or anything. Someone here linked a site called bogleheads, but to my dismay I found those guys assume a solid economic knowledge base.
I know the theory about stocks being partial ownership of a company. I think I understand how bonds are just fancy ways of saying “loans”. What I don’t understand is when Vanguard describes the “SEC Yield” of a particular fund. For example, a fund called “Wellesley Income” lists an SEC Yield of 5.14. Do people that own shares of this fund get 5.14% of their investment as cash in the mail every year? Does the value of the fund go up and down at the same time, so you can potentially buy in with the minimum 3,000 dollars and eventually end up with 10,000 dollars worth of the fund? What is the “account service fee” mentioned in the sales pitch for that fund? What does the expense ratio of 0.33 mean?
Probably more important than all of those questions is "where can I find a resource to answer stupid questions like this, that doesn’t assume I already have any basic financial education?
This book has really simple explanations on what all those terms mean. It goes into it very simply but you have a clear understanding what is going on.
Good luck!
Hey… in the same boat… however… I don’t even GET why/who will buy my stock.
Let me explain. I buy 1 stock X worth $50 - thats all. Where do I sell it - who do I sell it to - do i need a fund manager? I mean, lets say that company XYZ wants to purchase 50% of the stock, im only a miniscule owner… how do they find me, and why would they bother buying ONE $50 stock, when lest say a big corporation like QWERTY has 60% of the stock for X and wants to sell most of it. Wouldn’t comany XYZ just ask QWERTY for it??
OR
What if I want to sell my stock X and everyone else wants to keep theirs but theire just not buying anymore… stock price is steady, I want my $50 in cash… who do I give the stock to to get my cash?!!
Look… my questions MAY be dumb, but I never understood this, or it has never been explained to me in language that a 5yr old would understand.
You go to a stockbroker, who will buy or sell the stock for you. If you only want one share, it’s called an odd lot. It could be sold singly, but more likely it will be grouped with other odd lot buyers or sellers to reach 100 shares. This is usually done on a stock exchange like NASDAQ or the NY Stock Exchange. If someone tries to sell a single share, the specialist/market maker (see below) will either group it or sell it.
For a long time, people would buy single shares of Disney because it gave them an admission to Disney World. I believe commissions on single shares are higher, since the transaction is more complicated, but it will be sold.
Once again, you give it to your broker, who takes it to the exchange. At the exchange, there is a specialist (NYSE) or market maker (NASDAQ) whose job it is to match buyers, but also buy and sell stock from their own account so that things don’t get held up. Thus if they got the order to sell one share at $50 (assuming that’s the current price), the specialist/market maker would buy if from you if no one else wants it. He would then sell it if a buyer came along and there wasn’t a seller available.
However, from your point of view, all this is invisible. You’d go to a stockbroker and she will take care of the transaction.
The most basic place to start is to put some money in an account at an institution that has a wide variety of investment options. ETrade, Charles Schwab, Fidelity and the like are examples of firms which happily cater to small investors, and will all help you set up an account and explain how to access it. You can even set up accounts online; this involves filling out the initial forms and either transferring money there electronically or sending them a check and waiting for it to clear.
My recommendation is to set up an account that you can easily access online–this is pretty much the standard anyway.
After you have such an account, you make your investment decision, go into the account online and buy or sell the instrument in question. This approach does not give you access to absolutely every investment vehicle out there, but it’s a nice way to start. For a stock, for instance, you just access your account online and make the trade; most online firms will have nice little teaching tools to walk you through how to do it.
Like Chief Pedant mentioned, the easiest way is to set up an online account with a major broker. You create the account, transfer money from your bank, and you can shop almost like shopping at Amazon. You look up various companies, research the stock, then go to the “trades” area and select what stock and in what amount you want to buy/sell. By the next business day,the trade is complete and the money is in/out of your account.
I would suggest going to the bookstore and buying a “dummies” style book on investment, or one geared specifically for small/novice investors. That should give you a good overview of the basics, and be there for quick reference.
I would also suggest not buying any instrument that you don’t feel you understand thoroughly. There are a lot of bizarre investment vehicles out there, mostly for sophisticated investors that need something very specific. You should stick to simple investments like Mutual Funds, especially Index Funds*. Buying shares of stock directly is nice, but it should not be your main investment because it’s a much higher risk than the Funds.
*Index funds are Mutual Funds that simply follow a particular stock index, they have lower fees because there’s no fancy pants Fund Manager to pay, and there’s little evidence that Mr Fancy Pants does better than the market as a whole anyway.
It is a classic that describes how and why the market works, not how to make a million bucks in 3 easy steps, in simple language even I can understand. It’s been through many revisions over the years. IMHO it should be required reading in all high schools.
First thing I would do is buy some sort of Dummy book on basic accounting. Before you even think about investing, you should understand the language of business and be able to read corporate financial statements.
All books on money and investing are written by someone (duh), and most people have one philosophy or another on money and investing, so that when the books are written, a neophyte reader does not perceive or recognize these biases. In many cases, those slants are subtle and may not be relevant. But the least you can do is to understand that. That said, I’d recommend a book that starts at the beginning, called The Truth About Money, by Ric Edelman. He explains things that you think that at your age you should understand, because everyone else seems to. It’s very good and should help you to understand the real basics.
-SEC Yield. It is your true rate of return after the fund’s expenses have been deducted.
-The amount of cash you receive in the form of distributions is variable and depends entirely on how the fund is run. Usually funds maintain records of past distributions, so you can see what kind of cash payouts have occurred previously.
-Yield = (Distributions + Final value of your fund shares)/(Staring value of your fund shares)
-Yes, the value of your shares go up and down. With mutual funds, you buy into the fund and obtain some shares. Your money is then pooled with the money of other investors. With this pooled money, the fund manager buys assets. The current share value (Net Asset Value) is just (Total Value of Fund Assets)/(# of shares outstanding). See here for some information on mutual funds.
-The account service fee is Vanguard’s fee for maintaining your account in the fund. It’s described on “Fees & Minimums”.
-It costs money to buy and sell assets. It also costs money to hire a fund manager to run the fund, and to hire analysts to do research. Further, the company running the fund is also trying to make some kind of profit by providing a service. These expenses are all paid for out of the funds assets. An expense ratio of 0.33% means that for every $100 worth of assets the fund owns, you can expect that $0.33 will be eaten up by expenses, leaving $99.67 for the fund manager to actually invest.
More of an IMHO thing, but any basic book on investing that explains stocks, bonds, and mutual funds would be fine.
If your goal is to invest for your retirement, one simple approach is to invest in something called a “life-cycle fund”. Here is an article about such things from Investopedia. But basically, such things split the principal amount of the fund between equities and bonds and gradually up the percentage invested in bonds as the target date (generally meaning your expected retirement date) approaches.
Because a basic principal of investing for retirement is that someone who is already retired or for whom retirement is approaching cannot tolerate much risk. But someone who is relatively young and has decades to go until retirement can reasonably have a higher-risk investment. Equities (i.e., stocks) are considered higher risk but higher potential return while bonds are considered lower risk and lower return.
Actually, I completely disagree. If – as a first time investor – you’re getting advice that ends up in anything other than ‘pick a good index fund or buy a house to live in’ it’s probably bad advice.
Reading corporate financial statements is for full-time investment managers who work at mutual funds. Except it turns out most managers don’t do much better than either a monkey throwing darts or an Index Fund (and it’s really hard to predict who will do better than the monkey in any given time period). And both monkeys and Index Fund managers are a lot cheaper than full-time managers, so there’s more money left over for the investor.
All you need to know about investing, really, is that risk is proportional to return, diversification lowers risk for free, and you need to minimise transaction costs.
On the other hand if you’re actually interested in actively managing your money, start a thread in IMHO and a few of us can probably go into some more interesting detail, but there will be arguments
If you are looking for something extremely simple, I would suggest I Will Teach You To Be Rich by Ramit Sethi. Ignore the cheesy title, it’s not a get rich quick scheme. The guy offers the simplest things you can do to improve your wealth. That means he leaves out some of the more advance techniques to make money, but you need to learn the basics first.
He even holds your hand through the process of creating an investment account and placing your money in the right founds. He also deals with all the reservations amateurs have about investing so that you’ll worry less about actually doing it. It’s a very simple and easy to read book. A great place to start.
I feel more educated now.
