I can count on one hand how many conversations I've had in the past decade with other gay men about investing in the stock market. I'm not sure why money and investing is such taboo in our culture, but I think instead of shying away from the topic, we should speak more openly about investing.
Investing isn't for the faint of heart. On any given day, your investment can rocket up 5% or drop 10%. There are many ways to invest and many investment vehicles to choose from. If you don't feel comfortable doing it yourself, consult with some financial advisers willing to help you take the first steps. Find an adviser who understands your financial goals and who you can trust. It is your money!
Let's go over some terminology for a moment. The easiest form of investing if opening a traditional savings account, however today, interest rates are so low, growing your money through a savings account would take centuries. Instead, if you want to dip your toes into the investment waters, without taking on much risk, opt for a money market fund. You can open these at a bank as well, but this type of vehicle pays slightly more interest.
Next, let's talk about stocks, bonds and mutual funds. For starters, a stock is a share of ownership in a corporation. A bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market.*
A mutual fund is a professionally managed investment fund that owns a collection of stocks in various companies. Mutual funds have advantages and disadvantages compared to investing in individual stock. One of the biggest advantages of a mutual fund is that they provide diversification, liquidity, and are managed by professional investors. On the negative side, investors in a mutual fund must pay various fees and expenses. I personally own a few of Vanguard's mutual funds. I tend to tell friends about these as the fee to purchase is often very low.
I recommend watching CNBC for a few weeks before making a decision on how and where to invest. The station is a great resource for business news and they always bring on knowledgeable experts who will provide advice on a number of topics. Sometimes they will even provide some stock recommendations, but I do advise to do your own research on a given stock before taking the plunge. Individual stock investing is not for everyone.
In future posts, we will discuss a few other investment options and more importantly, the miracle of compounding!
*O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 197, 507. ISBN 0-13-063085-3.