Uncomplicated Wealth Building for Beginners: Investment Jargon is Boring and Complex...Says Who?

 

Investing is primarily done in the form of stocks and bonds.

A stock is a partial ownership of a company that is sold at a price to us by companies.

A bond is a loan that you give to a government or a company and they pay you back with interest on it, which becomes your earning. So in other words you become the lender.

 

So what then is a mutual fund?

 

Let us say Amith has 700$ of savings and he finds out that Apple stocks are going to soar due to the latest iphone being a super sell-out, and he wants to buy some stock of theirs. But the apple stock at that time was 1200$ (for example). So he cannot buy the stock of Apple with the money he has. But if his friend wants to invest  in the same stock, the two together can buy an Apple stock. But the friend also wanted to invest in Home Depot stocks that cost 150$. So Amith helps him out partly by splitting his money to get the apple stock he wants, but also in the process  get the home depot stock between him and the friend. A mutual fund is just that.

 

A mutual fund allows an individual's money to be pooled with other people's money to buy a basket of stocks or bonds. The fund is managed by a different company and there are fees associated with the management of this fund.

 

You might ask....So if Apple stock is going to soar why do I need to go buy a mutual fund and pay a different company additional fees for this basket of stocks?

Well the power of a mutual fund is that by spreading your money over multiple company stocks, you reduce the risk of loosing most/all of your money if the one stock you invested in dies.

For the smart investor, the key is to not be impulsive, emotional, and too focused on one area. Spread the money out and by choosing the right mutual fund, you can be less prone to dramatic losses.