Don't Break the Bank: A Student's Guide to Managing Money (25 page)

Doing the Diversification Dance

The perfect scenario when it comes to investing is having limited risk while also having the potential for some nice rewards. One way to do those is by diversifying. This means you divide up your money and invest it in a bunch of different things. Some investments may be low-risk, while others would be higher risk (with the chance for bigger rewards). If you don’t want to chance losing too much, you would put most of your money in low-risk investments.

Liquidity

Another thing to consider with investments is how easy it will be to get your money when you want it. This is called liquidity. With some types of investments, your money is tied up for a specific period of time, and you won’t be able to get access to it (or if you do, you may be charged a penalty fee).

Stock Market

Want to have some fun while learning a lot about the stock market? TD Bank offers a “Fantasy Stock Market” game, where you can “virtually” play the stock market with $100,000 fantasy dollars. You can check stock quotes, look up ticker symbols, learn stock market terminology, track your daily performance, and compete against your friends. You can find this game on the TD Bank Web site at       
http://virtualstockmarket.tdbank.com/
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One of the most popular ways to invest is through the stock market. A stock is a piece of ownership in a company. (So, yes, you could technically say you are a part-owner of the company, but your piece of the company is usually very, very tiny.) When you buy stock in a company, you are known as a shareholder.

The stock market is where stocks are traded (bought and sold). The goal is to buy a stock at a cheap price, and then sell it once it is worth a lot more. This is known as buying low and selling high.

The stock market can involve a lot of risk and is not for the faint-hearted. It is often like a roller coaster. Within a span of a week, your stock’s value may go up and down, and up and down again. Stocks are not guaranteed by the government or anyone else. There is the possibility that you could lose most or all of your money.

Not all companies have stock available. A company sells shares in order to raise money to expand, hire more employees, or for other reasons.

Some Important Stock Market Terms

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Asset
: Something that will rise in price and can be sold for more money.

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Bear Market:
The time when stock prices fall for a while. Many people believe this is a good time to buy stocks.

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Blue Chip:
A large company’s stock that is likely to be low risk.
Microsoft and Apple are good examples. (Just don’t tell them they have something in common…)

•
Bond:
Sold to get money to start up a business or support the government. It collects interest over time.

•
Bull Market:
The time when stock prices go up for a while. This is when people try to sell their stocks.

•
Capital:
Money used to try to get more money. For example, the purchase price of your stock is your capital.

•
Inflation:
When the price of everything goes up.
In 1980, the cost of a regular gallon of gas was about $1.25. Compare that to what you pay when you fill up your car’s tank today—that’s inflation!

•
Portfolio:
The collection of all of your investments.

•
Profit:
The money you make after selling stock.

•
Stock:
Partial ownership of a company.
It’s like sharing, but sometimes everybody loses everything.

Check Out My CDs

Certificates of deposit (called CDs) are investments in which you deposit a certain amount of money (usually at least several hundred dollars) for a specific period of time. The interest rate varies depending on the type of CD, but because there is virtually no risk, the interest rate isn’t as high as other, riskier investments. Like bank accounts, CDs are insured by the government, so you cannot lose your money.

When you put your money into a CD, you agree to keep it there for a certain period of time. If you try to withdraw your money early, you will pay a penalty.

Money Market Accounts

A money market account is an investment account you open through a bank. The bank invests your money in low-risk places and pays you interest. The interest can vary from day to day. The bank may require you to invest a minimum amount in order to avoid fees. You can take your money out when you want.

Mutual Funds

Mutual funds are sort of a combination of the stock market and diversification. You give your money to a broker or fund manager, who invests it (along with money from many other people) into a bunch of different places that may include stocks, bonds, real estate investments, and others. Usually, a mutual fund will combine a variety of low-risk and higher-risk investments. So, you still have some risk, but it is usually less than with the stock market. The interest rate you earn will depend on how well the investments do.

Government Bonds

U.S. government bonds are considered among the safest types of investments because they are guaranteed by the federal government. They became very popular several decades ago during major wars when the government sold bonds in order to raise money to pay for war costs. They are still popular because of the lack of risk. The downside is that your money is tied up for a certain period of time (usually quite a few years). The EE bonds allow you to double your money, but will take a long time. Say you want a $100 bond. You pay $50, and then you must wait for the bond to reach its maturity date, which will be years later. At that time, you can cash in the bond and get your hundred bucks.

Real Estate

Some people like to invest in real estate. This isn’t something everyone can do, though, because you need to have a lot of cash available in order to buy, maintain, and possibly fix up properties. People who invest in real estate will either keep the property and rent it out (becoming a landlord) or wait for its value to increase and then sell it for a profit.

Collectibles

Some people like to buy collectibles as an investment. Collectibles could include anything from baseball cards to sports cars. When you invest in items like these, you are counting on the fact that they will increase in value as time passes. But there is no guarantee that will happen, and there are lots of stories of people who bought a lot of things they thought would be collectible, only to later have to unload them cheap on eBay or at a garage sale.

Glossary

Adjustable rate:
an interest rate that can change depending on the economy or other circumstances.

Allowance:
an amount of money that someone (usually a parent) provides on a regular basis as spending money.

Annual fee:
fee a credit card company will charge you just for having the card, whether you use it or not. Not all cards have an annual fee—and for those that do, the fee can vary widely.

Annual percentage rate (APR):
yearly interest rate you will be charged for any balance you carry on a credit card.

Asset:
something that will rise in price and can be sold for more money.

ATM:
automated teller machine, which you can use to make deposits and withdraw cash from your bank account.

Balance:
amount of money in your bank account at a given time; amount owed on a credit card.

Barter:
to trade one thing for another. If you have something another person wants, and they have something you want, you can make a trade that makes both of you happy.

Bear Market:
a period when stock prices fall for a while.

Blue Chip: a large company’s stock that is likely to be low risk.

Bond:
sold to get money to start up a business or support the government. It collects some interest over time.

Borrow:
to take out a loan. You obtain money from a person or business (usually a bank or loan agency) and agree to pay it back with interest.

Bounced check:
a check that exceeds the balance of your bank account and causes your account to become overdrawn (go into the negative). Your bank may honor the check or return it unpaid, but, either way, they will probably charge you a fee.

Budget:
a plan of how you will spend and/or save your money.

Bull Market:
a period when stock prices go up for a while.

Capital:
money used to start up a business or fund a project

Compound interest:
when interest accumulates and is added to the principal, causing a sort of “snowball effect.” You end up paying interest on previous interest charges that have been added to the principal.

Contract:
a written agreement between two people or parties that spells out the terms for a loan, sale, or other business transaction.

Co-signer:
someone who signs a loan or rental application with you. This person agrees to be responsible for that debt, should you fail to pay it.

Credit report:
a history of what you’ve borrowed and how you have paid your debts.

Credit score:
a 3-digit number that is calculated based on your credit report. Lenders and businesses use your credit score to decide whether to approve you for credit or a loan.

Debit Card:
card linked to a bank account, usually a checking account, used to pay for things instead of cash or check. You can only spend as much as you have in your bank account at that time; otherwise, your transaction will probably be declined, or your account will become overdrawn.

Debt:
money that you owe to someone. Debt is often the result of a loan or a credit account.

Deposit:
money put into a bank account.

Direct deposit:
when your paycheck or other payment is automatically deposited into your bank account.

EFC:
Expected Family Contribution, a figure calculated by the government to help determine your financial need for student aid. The higher your EFC, the less chance you have of financial aid.

Entrepreneur:
someone who starts his or her own business.

FDIC:
Federal Deposit Insurance Corporation, a federal agency that insures your bank account, covering your deposits (up to $250,000).

FICA:
Federal Insurance Contributions Act, which allows for deduction from your paycheck to fund Social Security and Medicare programs.

Finance charge:
costs that a business (such as a bank or credit company) adds to your debt as a fee for providing or servicing the loan or account.

Fixed rate:
an interest rate that stays at one amount for the length of the loan.