Investing Basics: Cash, Bonds, and Stocks

by Guest Poster on August 31, 2010

This post was written by Nathan Richardson the founder of ComplexSearch. Nathan enjoys blogging deals and help consumers save money.

One of the basic rules of investing is this: Don’t invest in something that you don’t understand. The violation of this rule is one of the reasons that we ended up with a financial crisis that threw the entire world into economic recession. However, this does not mean that investing is bad. Indeed, you will probably need to invest in order to build up enough wealth to get you through your later years. But before you invest, consider the basics.
Most people invest in cash, bonds and stocks. It is a good idea to have an understanding of the risks associated with each of these financial products.

Cash

Most people do not think of cash as an investment. Many financial planners and investment professionals simple speak of “cash products.” However, cash does provide a return. It is usually a rather small return, but your money is working for you then it is in cash products nonetheless. You can put your cash in a high yield savings account or build a CD ladder to help boost the returns you get from cash.
The main reason that cash offers such low returns is due to its safety. It is practically impossible (although actually possible in theory) to lose money when you are dealing with cash. The main way that people lose money with cash is through inflation. If you are only earning 2% annually on your cash, but inflation is at a 3% annual rate, you are really losing money, since your purchasing power is eroded. However, in terms of losing your dollars, it is not very likely – especially since many cash products are FDIC insured, guaranteeing that you get your principal back (up to $250,000 an account), even if the bank fails.

Bonds

Generally, bonds are considered riskier than cash. They are not FDIC insured, and there is a real chance that you will lose some of your principal. Bonds, at the most basic level, represent a loan to some organization. When you invest in bonds, you are providing capital to a government organization or company. In return, that entity pays you regular interest, and then returns the principal to you when the bond matures. The main risk is default on the repayment of the loan. You still have the interest that has been paid up to that point, but you could lose out on principal you fronted to the organization.
As with most investments, the riskier something is, the higher its potential returns. A U.S. government bond offers a very low risk of default, and so the interest paid is lower. Emerging market governments, though, offer a higher chance of default, so when you invest in those bonds, the interest you are paid is greater. Companies range in chance of default from small to great, and if you are willing to take a chance, there are bond investments that can help you beat inflation and end up with a tidy little return. There are agencies that rate governments and companies so that you can get an idea of the risk of default (although these ratings agencies may not be wholly accurate).

Stocks

While a bond represents a transaction similar to a loan, a stock share represents ownership in a company. When you purchase stock shares, you are purchasing a small bit of the company. As a result, when the company does well, so do you. Stocks are bought and sold on exchanges, and when a company’s stock is in demand, its share price rises to reflect its desirability. On the flip side, though, when a company is perceived as being in trouble, its price drops. If you sell a stock when its price is lower than when you bought it, you lose money.
Because stock prices are driven largely by perception, they can be volatile. Something that is doing well one day may do terribly the next. Investing in individual stocks – especially those from new companies – can be quite risky. As a result, you could see better returns than what is seen with cash and bonds. However, with that increased earning potential is a chance for bigger losses.

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Shopping Online Debt Free: By The Numbers

by John on August 26, 2010

If you’re unfamiliar with eBillme.com, check out why it’s a new and revolutionary way to shop online - review here. With eBillme, you can shop on the internet using your bank’s online bill pay – allowing you to forgo using your debit or credit card!

Recently, eBillme released some interesting statistics on where America’s online debt free shoppers are located. Check to see if your state or city made the list! eBillme interviewed John of The Christian Dollar a few months ago.

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Our Decision: Continuing With Focused Intensity

by John August 23, 2010

This is more of an update article on our lives than anything else. Courtney and I have come a long way with our finances. We were both heavy spenders before marriage. Today, we’re on the extreme side of frugal. As of late, our financial focus has been tested due to several big projects that have [...]

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Will Others Pay Off Your Debt? Don’t Always Count On It!

by Guest Poster August 10, 2010

This article was written by Maria Bush and edited by John Frainee. If you would like to write for The Christian Dollar, start here! — If you are buried under a lot of debt and don’t know what to do you might be thinking: “how do I get someone to pay off my debt”. You must [...]

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3 Tips To Save MORE Money At The Checkout

by John August 2, 2010

You’ve read a lot of articles about saving money at the grocery store, on your bills, and more. But have you ever considered that you can save money on the fly at the checkout? Following these three basic tips will help you discover new ways of saving even MORE money when you step up to [...]

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What’s Your Financial Purpose?

by John July 30, 2010

Wealth-building is worthless if you don’t know what to do with the money once you have it. Every so often, it’s important to remind ourselves that piling up cash is in vain unless we purpose it for something bigger than ourselves. No amount of stuff is going to satisfy. So what’s your purpose? Why do [...]

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How To Save Money On Your Computer Needs

by John July 23, 2010

It’s a tool for our minds; a lever and fulcrum, if you will. In today’s world, it’s difficult to live without a computer. Many of us use computers to pay our bills, keep our finances on track, and enjoy a streamed movie or two on Netflix. Over time, computers break down. Not only the hardware, [...]

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Got Excellence?

by John July 16, 2010

You want to be financially fit. You want to be physically toned. You want to be spiritually on track. You want to create a better you. If these things reflect your attitude, you’ve already taken the first step towards excellence. Listening to Dave Ramsey on the radio the other day, he gave a monologue on [...]

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Video Devotional by Rick Dancer: God’s Wastefulness?

by John July 9, 2010

Rick Dancer has been in the television news industry for over 23 years, and I remember watching him on our local news station. I’ve always respected this man, and have enjoyed his YouTube channel where he frequently discusses life and faith. Here’s one of his videos which he cleverly entitled “God’s Wastefulness.” Rick makes some [...]

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3 Free Online Apps To Enhance Your Productivity

by John July 6, 2010

When it comes to productivity, nothing beats a solid computer with awesome (and free) software. Many are still pen and paper junkies, but there’s just something about clicking another item off your to-do list or automatically accounting for expenses that takes the cake. Therefore, here are a few free productivity apps that you can grab [...]

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