Before we can decide if we want to invest in stocks, bonds, and mutual funds, we need to know what they are.  Stock is simply ownership of a company.  A company might divide its ownership up into one million little pieces, or shares, and then trade those shares on the open market.  If you own one of these shares, you own a little piece of that company, and are entitled to your share of the privileges of ownership.  When the company announces higher-than-expected earnings, it may divide up those earnings among its owners.  And because you own a share of the company, you’ll get a share of the profits.  When the company announces a new product, the price of your share may go up.  You could sell your share and make a little profit, or you could hold on to it and hope it goes up ever more.  Of course, it could go down, too, and this is the danger with stock market investing.

While stocks represent the ownership in the company, bonds represent the debt of the company.  When a company wants to borrow money, it might issue a bond, which is simply a promise to borrow money and repay it at a later date, with small interest payments along the way.  If you own a bond, you’ve loaned the company some money, and they will make payments to you - the same way you make payments on your loans.  One danger with bonds is that the company could default on its debt and leave you holding the bag.

Since there are so many different companies offering their stocks and bonds to the public, and since there are dangers inherent in this kind of investing, how do you know which specific stocks and bonds you should invest in?  Wouldn’t it be better to own a basket full of different stocks and bonds, so that if something bad happened to one company, you’d still have a pretty full basket?  That’s the idea behind mutual funds.  A mutual fund is a giant basket containing dozens or even hundreds of different stocks and bonds.  Owning a share of a mutual fund is much like owning a share of a company, when the stocks and bonds in that fund do well, you get a share of the profits.  By yourself, you might never be able to invest in so many different companies, but when you pool your money with thousands of other investors, you can own great positions in many companies.

This post originally appeared in the November 21, 2007, edition of the Greenhorn Valley View.

My sister’s family has put up a blog for their extended family.  Several people throughout the family have posted; topics include: all about jenna’s boyfriend, a forum for waxing theological, and 50 things you didn’t know about heather.  What a great way for a geographically dispersed family to stay up-to-date on each others activities!

Check out Tomeo, Tomeo at http://tomeos.wordpress.com/

Hopefully, if you’ve been saving long, you’re starting to build up a tidy little sum in your savings account.  Before too long you’re going to wonder what to do with all that cash.  You know there are investment options available, but you’ve also heard that some people have lost their shirts with their investments.  Should you get involved?  Maybe it would be best to stay out?  What, exactly, can you do with a little extra money, and what are the risks?

You could continue to what you’ve always done, i.e., leave the money in your savings account.  This is possibly the safest option, since all bank deposits are insured.  Even if your bank should fail (as mine recently did), your money would still be safe (up to $100,000).  The downside of this strategy is that you’ll be earning fairly low interest rates.  My new bank is currently paying 4.2% on a money market savings account.  While that’s pretty good for a savings account, it’s only a tiny bit above the inflation rate, which means it would take an excruciatingly long time to grow your nest egg.  This type of savings account would be a great place to keep your auto insurance premium, for example, if it was due three months from now.

A bank Certificate of Deposit (CD) is an option with an attractive feature - it earns a higher rate than a savings account.  My bank is currently paying 4.8% for a six month CD, and this money is also fully insured.  The downside is you have to tie up your money for six months.  If you need this money before the six months are up, you’ll have to pay a fee to get the money out.  Because of this limitation, CD’s are great places to keep money you don’t need right away, but will definitely need in the near future, like the money you’re saving for your vacation next summer.

But what about stocks, bonds, and mutual funds, that’s where the big money is made, right?  Yes, but big money can be lost here as well.  These types of high-octane investments can be thrilling and depressing, sometimes all in the same day.  Tune in next week when we discuss the advantages and disadvantages of each.

This post was previously published in the November 14, 2007, edition of the Greenhorn Valley View.

Here’s a great trick for finding music on the Internet.  Do a google search for this:

-inurl:(htm|html|php) intitle:”index of” +”last modified” +”parent directory” +description +size +(wma|mp3) “Bob Seger”

Replace “Bob Seger” with whatever you’re looking for.  (Leave the quotes.  Put what you’re looking for inside the quotes.)