I am at FinCon for the rest of the week. So that you’re not left wondering what happened to this site, I have a few old posts from other sites that are coming back from the dead, as well as a fantastic investing basics posts written by a new (and very smart blogger), Jennifer, who writes To My Girlfriends. Jennifer’s graciously offered up her knowledge of investing (since I know nothing about it) as a tutorial on DMS (which I appreciate so much). When you’re done reading this post, head on over to her site and show her some love!
Hi there. My name is Jennifer, the blogger behind To My Girlfriends. The blog was created because I wanted a venue to share financial tidbits with all “my girlfriends.” Sometimes the content is deep, but I always try to make it easy enough to read if you have limited knowledge about all things financial.
Why should you listen to me? Well, first, I do come with some credentials I am an Accredited Financial Counselor through AFCPE.org (The Association for Financial Counseling, Planning & Education). I have been accredited since 2009. Years prior, I was a registered representative for a financial services company and held a Series 6 & 63 license to sell mutual funds. I also held a life insurance license. I was an independent contractor for said company so I maintained a staff and an office.
This is the beginning of a series of blog posts about investing….the hows and whys. Like some of you, I didn’t know the first thing about investing. All I knew was that my future husband went down to our local bank and opened an IRA (Individual Retirement Account) and I thought I should probably do that too. The banker gave me some investment choices and I made my decisions based on those “stars.” I even invested in the multi-national company that I worked for at the time. They took $10 out of my paycheck a week to start my journey toward owning stocks. Things changed for me, however, when I was finishing up my degree in business and I took a finance class. I fell in the love with the concept of compounding interest…earning money on the interest earned.
So let’s start at the very beginning of what I call the investing cycle…the birth of a business. Most businesses don’t start out as large conglomerates. Think Bill Gates and his garage here. You (just as an example), and maybe a friend or 2, have an idea and decide to offer your product or service to those around you. The idea takes off and more people want what you are offering. You need a little more cash to either buy more supplies or to lease office space so you hit up Mom & Dad, your aunts and uncles, friends, neighbors, etc. You ask them to loan you some money with the intent of paying it back with interest (more money than what you borrowed.)
Now the idea is really going and you know you need more cash for updated computer systems, maybe a truck, new tools, etc. You get the idea. You head to ABC bank. They give you a loan (maybe not in this economy) and off you go to grow your business. You are really cookin’ now! And you need more money to hire salespeople, office staff, truck drivers, computer help, etc, but the bank isn’t interested in giving you more money. So you reach out to what are called Venture Capitalists. These are people or groups of people who are in love with your business. They want to give you money. Great! The catch is that they want a “piece” of your business. Let’s say they give you $200,000 to invest in the business but they want 25% of the profits. So your business grosses (before taxes) $500,000 for 6 months, the Venture Capitalist takes their $125,000 in profits.
Make sense so far?
Your vision has changed and you want to go national with your idea, maybe even international. Good for you and your success! You decide you want to take your business “public” to raise even more money. The Venture Capitalists aren’t going to be the only investors in your business any longer. Large mutual funds will buy shares, as well as Mom and Pop. You reach out to an investment bank to get your IPO (initial public offering) out to the public. Once you are launched anyone can purchase a piece of your company.
And this is where “investing in the stock market” comes in for most of us. We like a company or a product and we want to own a piece of it. Most of us purchase what we think are pieces of companies through mutual funds. Those mutual funds are dressed up into vehicles called IRAs or 401(k)s. There are managers of those funds who decide which companies they want to invest in and what percentage of your money will go to each company. For example you give Ms. Money Manager of XYZ Fund $100 of your money. Ms. Manager then invests in 10 different companies for you. Now you “own” a piece of ten different companies THROUGH the mutual fund. You don’t physically own the shares or the company. Ms. Manager’s fund purchases pieces of the companies on everyone’s behalf and you purchase shares of the XYZ fund. If you purchased some shares of your favorite soft drink company directly then YOU own the shares.
You still with me?
I think this is enough for you to chew on for now. Not all businesses follow this exact trajectory, but it is safe to say a lot do. I just wanted to give you an idea of the general process.
In the next part of the series we’ll cover Next we will cover IRAs, 401(k)s, 503(b)s. They sound scarier than they are. As I always tell my girlfriends, you ARE smarter than you think.
