Chatting Money

As I started saving more money as a young’in, I had the chance to open a savings account. I didn’t really know what that meant, but my parents said then your money earns interest. They explained the idea of putting $20 in the savings account, and it might grow to $21 by next year. Cool I thought! I was lucky my parents walked me through that idea, I’m not sure everyone gets that key bit of info when you’re growing up, but hopefully by now most of us understand what a savings account does, the idea of interest on your money.

Leaping ahead in time, by the time I was in my 20s, I’d heard people say “you should buy that stock”, and I got the gist that could be a good thing, if you pick the right stock. Not entirely sure what that meant or how that worked. You hear the terminology of “stocks and bonds”, but really, what are they. When does someone explain that to you? Not sure it ever does get explained – so a bunch of us aren’t really clear about what they are if we haven’t sought out the answers on our own.

Don’t you hate it when you’re chatting with someone, or part of a group discussion, and they say something you don’t fully understand? You’re torn about whether you should ask, and derail the conversation – and potentially feel a little silly showing what you don’t know….or you just pretend you know, and go on trying to figure it out from the context of the conversation?

Well, let’s walk through it! Stocks and bonds – they’re both investments. They can make money when you invest money in them and both can also LOSE money – vs a savings account which is a completely safe investment, even insured by the US government if the bank goes belly up (that’s the FDIC).

A stock is really “taking stock” in a company – when you buy a share of stock, you are actually buying a piece of the company. So you own a little sliver of the actual company – and that investment goes up and down, as people either have more confidence in the health of the company (price goes up since more people want to buy), or fear the company is not in good shape (price goes down, people want to sell). Stocks are also called an “equity investment” because again, you buy equity in the company.

Honestly, the pricing can be really volatile, going up and down with no way to predict it, and nothing specific the stock price is ever tied to. It just goes up if more people want to buy it, and down if more people want to sell it. People for decades try to predict the future price of stocks, and try to tie it to how much a company earns (the EPS, or “earnings per share of stock”), but there is absolutely nothing that sets a stock price.

If you look at the price of Amazon (ticker symbol is AMZN) one year ago, it was $1689 per share (June 11, 2018). Over the last year that price has gone up as high as $2050 per share, and as low as $1307, and today it’s at $1872. Quite a ride!! But 5 years ago, on June 13, 2014, the price was only $327. So despite all those ups and downs in a 1 year period, in the longer run of 5 years, pretty good return if you bought a share for $327, and now you can sell at $1872, right?

When somebody starts a company, it’s called “private” because specific people are owning it, maybe the founder, and maybe their friends or family gave some money, maybe they found someone who believed in them, and they gave them $200,000 in exchange for getting to own a piece of the company – they would all then be private owners and investors. But say a company wants to try to raise MORE money – maybe they want to start selling their product across the US, or internationally. Then they can do an IPO – which is an initial public offering – which means you go out to the public (a bunch of strangers), and say “hey, if you believe in my idea, you TOO can buy a share of the company”. They work with banks to organize all this, and assuming enough people want to buy shares in the company, they can start trading those shares on a publicly traded stock market.

Then instead of just people the founder knows giving them money, any individual in the general public can buy a share of stock that is traded on a stock market like the NYSE (New York Stock Exchange) or the NASDAQ – the two big ones in the US. The are many different public stock markets around the world.

There’s a thing called the S&P 500 – which is an aggregation of the top 500 biggest companies, put into an index. You can actually buy this “index”, they call it (just a weighted average of those 500 public companies) and essentially own a piece of the top 500 companies, instead of trying to pick individual stocks. Here’s a snapshot of the S&P has performed since 1950 – generally “UP”, showing you in general, stocks can be a good investment in the long run. If you bought a share of this index in 1980 and held it until 2020 (40 years), great investment. But you can see if you bought in 2005, and sold in 2009, you would have lost money.

It’s a fun idea, right?? You can buy 500 stocks in one purchase. If you google “INX ticker”, you’ll see it. So THAT idea, putting together a bunch of stocks instead of risking just ONE company where you hope the price will go up, that’s the idea of a “mutual fund”. There are LOTS of financial companies, investment companies like Vanguard and Wells Fargo and Fidelity, who put together a fund, a collection of stocks, that they think consumers like you and me will want, instead of trying to buy individual stocks that will do BETTER than an average of a bunch of stocks. And it’s pretty good plan, distributes out the risk from just having one stock.

Then what are bonds??? That’s when you actually loan a company money. This IS debt, you give someone a loan, and they guarantee they’ll pay you back with interest, provided they don’t go belly up and have nothing to pay back with. You do have to hold on to the bond for the length of time it’s asked for to when you “bought” it to get your full investment back, but while you’re waiting, you get interest payments regularly. So if you do a $1000 bond for 5 years, with a 4% coupon (that’s what they call the interest), they will pay you $40/year ($20 every six months) for 5 years. Fancy, and more guaranteed than a stock. You invest $1000, and after 5 years you get $1000 back plus $200 in interest ($40/year x 5 years). It’s all set out at the front – UNLESS the company goes out of business, OR you decide you want to sell it sooner.

There is a “bond market”, and you can always sell this debt to someone else if you don’t want to wait the full term, and THAT price isn’t guaranteed, it changes every day depending on how many people want to buy it. Companies will say the phrase “issue debt”, which means they’re offering bonds to normal people like us – really just asking for people to loan them money on a public market. They “issue” you the opportunity to loan THEM money. A handy idea if you’re trying to grow your company.

You can see how bonds are considered a MUCH more stable investment. You don’t ever “own” a portion of a company, you loan it, but you know exactly what you’re getting into. There are BOND mutual funds as well, where again a company puts together lots of bonds together, so you have a variety of returns in one fund, and then…..you guessed it….there are mixed funds, that have both stocks and bonds, so you don’t even have to pick. If a fund is 80% comprised of bonds, and 20% stocks, then it would be considered “safer”, again because the more clarified investment of bonds are the majority.

All sound fun?? Hopefully now you may be tempted to try investing. Maybe a mutual fund to start? Maybe you bought just 1 share of stock? At least have some lingo for small talk, see if conversations about stocks and bonds make a smidge more sense!