Whether you are a poor grad student from the humanities or a well-funded grad student from engineering, you will eventually need to invest (financially) in your future.
Savings and checking accounts are a great way to keep ready cash to pay bills, but they are a poor way to save for retirement or to increase your overall wealth. Investing allows your money to appreciate at a higher interest than inflation. This way you do not lose the value of your earned money over time.
While there is always a risk of losing your money while investing, you will always lose the value of your money if you never invest.
The three primary ways to invest are to purchase mutual funds, stocks, or bonds.
Mutual funds are one of the most common ways for people to start investing. Mutual funds are not stocks or bonds, but rather are group investments in stocks and bonds. You and a group of other investors invest together by pooling your money to buy stocks or bonds.
Unlike stocks and bonds, you do not choose the individual stocks and bonds in the group investment. The mutual fund manager (portfolio manager) purchases the individual stocks and bonds on your behalf from a variety of companies or industries. Usually these purchases have a theme, such as real estate, technology, and alternative fuels. Another theme is being mega-rich. You may have heard of the billionaire Warren Buffett and his mutual fund, Berkshire/Hathaway.
With mutual funds, you do not own any individual stock in the company, but rather just a share of the mutual fund. Mutual funds have a few advantages: one, you do not have to be knowledgeable about the stock market to choose individual stocks or bonds to start investing, and investing in several different funds can provide diversity, ensuring that you do not lose money (or at least limit your losses). On the other hand, you cannot choose individual stocks and you still can still lose money if, say, the real estate market collapses.
Another benefit of mutual funds is that you can often start investing with very little cash, sometimes as little as $50 a month, as long as you agree to automatically invest in a fund with direct debit. Some funds also charge management fees, while others have no fees at all, so be aware of that when you look at mutual funds. Likewise, before investing, check out the fund’s prospectus (the overview of the fund, what it invests in, and how it performs) and see what its success rate is over the long term.
You probably heave heard a lot about Wall Street, the Dow Jones average, and individual stocks in the news, such as the price of Apple either going up or down. But what is a stock?
The difference between a mutual funds and stock is that buying a company's stock actually makes you a part-owner of the company. There are several types of stock, but the most common type of stock is called, not surprisingly, common stock. Purchasing common stock makes you a part-owner of the company, with voting rights, and possibly entitles you to dividends (i.e., cash payments based on the profits of the company).
The advantage of stocks is you can have a higher return than a mutual fund if you invest wisely or get lucky, but mostly if you get lucky. On the other hand, there is no guarantee of keeping your money. The stock price can rise, stay the same, or lose all value entirely over time. This is why you should always diversify by buying stocks in a variety of companies or industries to safeguard your wealth.
If you wish to buy stock, you will need to use an online or discount broker, or a full service stockbroker.
Unlike mutual funds or stocks, bonds are loans, just like your student or car loan, except you are the one who is earning the interest.
The most familiar type of bonds are probably U.S. Treasury Bonds, which you may have received as a present from a grandparent or relative at some point. U.S. Treasury Bonds are the U.S. government borrowing money to pay off debt, which helps keep our economy from collapsing into a chaos of hyper-inflation and high unemployment. You may also have heard of “junk” bonds, which keep financially risky companies afloat and sometimes make (or lose) people lots of money.
Normally for bonds, a corporation or government (e.g., state, federal, local) will offer up a bond sale so they can invest in projects: a bridge, a new school, or to keep the U.S. economy afloat. In return for purchasing this bond, you will get your money back and also earn interest over the time of the bond.
Normally, buying bonds is considered a safe way to invest, but not a great way to increase your wealth, since bonds do not increase in value like stocks and you only earn interest at a set rate.
The advantage of investing in bonds is to not to lose your money. In fact, bonds are rated by credit rating agencies, so you can gauge how financially risky it is to buy them. The higher the rating, the safer the bond is and the more likely you'll get your money back. The worse the rating, the more likely the company will not be able to pay you back your loan or give you interest. On the other hand, higher rated bonds have lower interest rates and riskier bonds have higher ones, so you can potentially earn more money on them.
Often, it is safer to invest in bond mutual funds than to buy individual bonds, since you can diversify over an industry. You should also consider the issuer of the bond. For example, the interest on many government bonds is tax free.
Buying individual bonds is just like buying individual stocks, so you will need to use an online broker to buy them. However, you can buy U.S. Treasury Bonds straight from the government.
For more inversting information, visit these websites: