I kinda hate it when people call things ‘Something-Something 101’. I don’t have a good reason, I just don’t like the crutch. But in all fairness this is kind of a 101 post. I’m just not going to call it that.
As you all know, I interact with people all over the country and talk to them about money. Patterns in knowledge and behavior often come up, but the one that surprises me most is how uneducated people are about investing. I guess because I’ve been so into it since I was in 6th grade, I forget that a lot of well educated grown ups don’t understand the basics of investing.
That’s going to change today.
The thing is, you can’t get very far without understanding a few basic terms in investing. You’ll get caught up in the language you don’t know and it will prevent you from getting any deeper. So let’s go through a few terms you’ve heard but may not be able to actually define.
Purchasing stock is when you own a part of a company. You even get voting rights in that company.
Bonds are when you let a company borrow your money. You simply let them use the money for an interest rate.
The interaction of stocks and bonds
Not only are stocks and bonds different but they tend to have an inverse relationship. If the stock market goes down your bonds go up and vice versa. This is why owning both is a smart idea. It helps balance out your portfolio.
Mutual funds are groups of investments. They contain any number of stocks and/or bonds and are managed by a committee or company. Mutual funds can have hundreds of different investments in them. It’s diversification at its simplest.
A 401(k) is one option for saving for retirement. 401(k)s are only offered through employers.
IRA (Individual Retirement Account)
Your employer doesn’t offer a 401(k)? It’s all good. You can open an IRA and it does the exact same thing as a 401(k). The only difference is an IRA has lower annual limits than a 401(k).
There it is, your investing terms primer.
If you want to further solidify the information in your brain you can watch me run through these same terms on my Fox59 segment below.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.