watching money grow

Posted : April 12, 2018
Last Updated : April 12, 2018
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watching money grow

The earlier you start investing, the better. Learn how to build wealth with investing, compare the various types of investments, and explain the power of compound interest.

What Is "The Market"?

Maybe you have heard of the stock market but you have no idea what it is or how it works. That's okay. Many people have a hard time understanding it. The stock market is just one example of a financial market – places where people are able to invest their money.

Maybe this will help. Think of the stock market like a supermarket where lots of different things are bought and sold. Some people want to buy yogurt, some want to buy carrots, and others want to buy candy. There are a lot of different name brands as well as generic versions of different products. And everything has a different price. This is the same for financial markets. There are a lot of different things you can "buy." And you can choose what you want to invest in.

Riding the Roller Coaster

To help you better understand financial markets, think of a roller coaster. Why? Because if you look at a picture of the gains and losses in the stock market over time, it really does look like a roller coaster. There are lots of ups and downs. In the stock market, the parts that go up are places where investments are making money. The parts that go down, on the other hand, indicate places where investments are losing money. However, the likelihood that you will make money over the long term is pretty good. In fact, 100% of the twenty-year periods in the stock market since 1950 have made money. But, just like being on a roller coaster, you will get hurt if you jump off before the ride is over.

Watching Your Money Grow

Investing simply means putting your money in something that will make a profit for you. There are a lot of different types of investments, so it is helpful to understand a little about each one. Some investments have very low risk, but you won't make a lot of money. Other investments have more risk of losing money, but you also have the potential to earn more money.

Investing 101

When you’re ready to invest, it’s always a good idea to get help from a professional investment advisor. While you may not understand anything about bonds, the stock market, mutual funds, or investments, an investment advisor can help you. It is always important to understand the things you invest in. Here is a quick look at the basics of some of the most common investments available:

Money Market Accounts
Money market accounts pay only a little more than a regular savings account, so you won’t make a bunch of money off interest in them. However, these are low-risk investments and are a great place to park your emergency fund.

CDs (Certificates of Deposit)
CDs are another type of a low-risk savings option where you agree to leave your money alone for a period of time (such as six months, one year, or more). In exchange for leaving it alone, you will earn a higher interest rate.

Bonds
Bonds are basically a loan of money, like an I.O.U., to a corporation or government agency that needs to finance a project or an activity. The borrower agrees to pay the loan back (with interest) after a certain period of time. Bonds carry more risk than basic bank accounts so you could lose some money.

Stocks
Unlike bonds, stocks are not a loan of money, but they actually represent ownership. You buy (invest in) a piece of the company. You make money as the company grows and makes more money. Since you own a share, that means you get a portion of the profit. Single stocks, however, carry a high degree of risk. While you might make money, you could also lose a lot of money.

Mutual Funds
Mutual funds are investments owned by a group of people who put their money together to mutually fund an investment. That’s where the name comes from – a mutually funded investment, also known as a mutual fund. The money is used to invest in a collection of stocks, bonds, or other investments. Mutual funds are good long-term investments. Spreading your investments across a variety of mutual funds is called diversification and that helps lower your risk of losing money.

Growing Money

You’ve probably heard the phrase, “If money grew on trees.” That would be pretty cool, right? Whenever you want to buy something, you could just go to the backyard and pull a couple of $20 bills off the tree. Sadly, money doesn’t grow on trees. But if you will invest money and leave it alone for a long time, say forty years, you will see some incredible growth. Compound interest becomes a mathematical explosion for your investments.



Source: Ramsey Solutions
 

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