With current economic uncertainty (as of November 2022), people are looking at their long-term financial plans more than ever. And any good financial plan will inevitably include stocks and bonds… but what exactly are those?
These two things are fundamental investment categories. So the majority of any investment you make is going to be in either a stock or a bond.
What is a stock?
A stock is essentially partial ownership of a company. What’s really cool is that pretty much anyone can be making money by owning a part of a company.
As we’re seeing right now, saving money isn’t a good way to keep yourself financially stable. Even if you save $100,000 right now, in ten years that $100,000 could be worth the equivalent of about $50,000 today due to inflation.
If we look at history, the people that have become truly wealthy are the ones who haven’t simply saved their money — they’ve invested it.
For most of history, this investment had to come in the form of full business ownership. But now, with the invention of the stock market, you don’t need the funds to start a business from scratch, nor do you need to spend the time and energy running it. Instead, you can invest as little as a few cents and own a percentage of various companies.
The journey to stocks
When most people start a business, they don’t have stock to sell just yet. They’re a solopreneur or a small startups, and they’re still in the private space.
But as they grow, they’ll need more money to continue investing in their own success. They might sell their business entirely or sell a portion of it to a single investor. Sometimes, though, when a company has grown substantially, they need more than just a handful of investors.
This is where stock comes in. They make a portion or all of their company available for investment in the form of stocks — this means that anyone can invest their money into this company and, in return, they get ownership and financial gain as a return on their investment.
This stock is sold on the stock market, where you can go to find out which companies you can invest in and own.
What’s so cool about this is that you don’t have to actually own a business to see the benefits of entrepreneurship. You simply need to invest wisely!
What are bonds?
With bonds, you don’t become the part owner of a company. Instead, you become the bank!
What the heck does that mean, right? We’re not J.P. Morgan Chase over here!
Think of it like this: when you purchase a home through a mortgage, the process is simple. You go to a bank and apply for a loan.
Companies do the same thing, but they have two options for applying for loans. They can go to a bank, or they can go to the bond market. In this market, third parties will act as the go-between for your money and the business’s loan.
Most of the time, businesses will get a loan that is compiled of money from many different people. So each of you is getting a portion of the percentage premium on the loan, dependent upon how much of your money has gone into the total loan.
Investing in today’s world means that you don’t have to go out and do the work yourself. Instead, your money does all the work and heavy lifting. It’s why diversifying your risk by investing in multiple places is extremely important.
Just remember — this does not have to be complicated! If you want to work with an expert to make your investment plan, head over here to set up a time to chat with me.