The New York Stock Exchange

Thought Bwog Finance was a one time thing? You thought too soon! We’re back, and better than ever. Now that you’ve got your checking account covered, we’re back with “Basic Kinds Of Investments” so you have a place to put all that money you’re saving on monthly fees.

This Bwog Finance Column will be a intro to investing for readers who still think a CD is what came after the cassette tape and before the iPod. This is a rundown of different ways to invest, but it’s by no means an advice column on what to invest in.

CD – A CD, or certificate of deposit, is a long-term investment. A CD comes with a term, or how long it lasts, and an APY, or an annual percentage yield, which is basically how much you will earn in a year. For example, a one year CD with a 1.5% APY means that, after one year, the amount of money you put in the CD will have increased by 1.5% of the initial amount. The catch is that, usually, your money is locked away when you put it in a CD, and you’ll be penalized if you try to take it out before the term is over. However, interest rates for CD’s are generally much higher than rates for savings accounts.

If you suck at doing math in your head, like me, you can use this handy calculator to determine how much cash you’ll make based on the APY and term of your CD and how much money you put in initially. Here’s an example to make the concepts simpler:

  • Initial investment (how much money you put in CD) = $1,000
  • APY (interest amount, compounding yearly) = 1.5%
  • Term = 1 year
  • Amount of money you have after one year, when the CD ends = $1,015

That’s not a huge return on your investment (simple language: you only made $15, and you didn’t have access to $1,000 for a whole year). If you’re not good at budgeting or saving, this is a good option for putting money away short-term if you’re sure you won’t need it, and it will give you a higher return than most savings accounts. CD interest rates have also gone up recently, so you can get ones with APY’s as high as 2.75%. Use NerdWallet’s best CD rates tool to see how much money is required and what the terms are of various CDs. Note that the best rates will come with longer terms, so before you get a CD, decide whether it’s worth it to have your money locked away for a year if you could get similar returns by just putting your dough in a high-yield savings account.

Stocks – Stocks are like owning a tiny piece of a company. They are generally a riskier investment, because you never know when a company’s stock will go up or down. (I’ve been waiting for my stock in 3D printers to skyrocket à la Apple for years, but the moment still hasn’t come!). However, if you do your research and pay close attention to your stocks every day (and don’t invest too much money, unless you’re prepared to lose a lot of it), stocks are the best option for seeing the highest returns on your investment. You can invest in stocks using a a brokerage account with a company like Charles Schwab, Vanguard, or Fidelity. They will charge a small brokerage fee, $5-$6.

Start off with a small amount of money, and have a cut-off point for when you will trade your stock if it loses too much value or if it reaches a certain threshold and you decide you’re ready to cash in on your investment and move on to the next thing. Stock prices fluctuate throughout the day.

Mutual Fund – A mutual fund is something you can invest in that can be short- or long-term. A mutual fund is kind of like a stock, but it trades only once a day (so the price of a single share won’t go up and down all day long). Mutual funds pool together investors’ money and put it in a diverse set of investments, including stocks and bonds. Investing in a mutual fund is less risky than investing in stocks for a single company, because the investments are diversified, or spread all over the place, and they’re managed by professionals (so you don’t have to do a bunch of research on stocks). There are different types of mutual funds, including fixed income and index funds, but that’s a topic for a different column (or your own google search).

Again, you can invest in a mutual fund by using a brokerage account with a company like Charles Schwab, Vanguard, or Fidelity, and they will charge a small fee. You decide how much money you want to invest, and the price of each share is the closing price from the previous day.

ETF – An Exchange Traded Fund, or ETF, is a group of assets like stocks and bonds. It’s like a mutual fund, but it trades throughout the day, so the price fluctuates all the time. You can buy it like a stock, using a brokerage account, and you can get ETF’s that are specified–in a certain type of business (did anyone say 3D printers?) or with a certain goal; e.g. socially responsible/sustainable companies.

Bonds – Bonds are like loans with interest, except you’re the one giving out the loan instead of taking it (did you ever think this day would come?). Government bonds are the least risky bond, because the government never defaults on its loans. (Check out this cool article to see how much the US is in debt rn). You can get things like savings bonds through the US Treasury. Tbh I don’t really understand how bonds work, but you can get them either through a broker or from the US Treasury itself (their website is kind of sketchy).

Money Market Account (MMA) – A money market account is a kind of savings account that usually offers a higher interest rate than a normal savings account (1.5% and above). The catch is that your money is locked away to an extent–you can only withdraw $$$ or write checks a certain number of times per year. But it’s better than a CD, in that sense! These accounts might also require a higher minimum deposit or balance. Read this article to learn more about MMA’s.

The takeaway from this post is: invest your money, because leaving it in your checking or savings account means it literally decreases in value as inflation outstrips whatever measly interest rate your bank gives you.

Stock exchange pic by Aude (Own work), via Wikimedia Commons.