Today we’re going to wander into the world of finance and investing. No, wait! Don’t run away! I’m going to keep it simple, I promise. And I promise not to try and sell you anything.
A popular way to invest money for retirement is to take money every payday and invest it in a mutual fund. The mutual fund collects money from you and other holders of the mutual fund and invests it according to its investment objectives. There are all kinds of funds: growth funds, income funds, large-cap stock funds, small-cap stock funds, total stock market funds, bond funds, bond and stock funds, precious metal funds, etc. etc. etc. (When you decide to invest in a mutual fund, be sure and read the prospectus and make sure you understand everything there is to know about it before investing.) At the end of the day, the fund figures out the net asset value (NAV) of the fund by taking the total value of their investments and dividing it by the number of shares they have outstanding.
One of the most popular types of mutual funds is the index fund. The fund manager invests the money of the fund into the stocks that make up a specific index. So, if you had a fund that used the Dow Jones Industrial Average, which consists of thirty large companies on the New York Stock Exchange and the NASDAQ, the fund would invest in those thirty stocks, and the NAV of the fund would rise and fall with the index.
A few years ago, a couple of investment firms came up with the idea of exchange-traded funds, or ETF’s. ETF’s were like mutual funds in that they held stocks in other companies, but instead of the prices of their shares being set at the end of the day, they would be traded as any other stock and the value of the shares would be set by market activity.
One such ETF is PowerShares QQQ, sold by Invesco PowerShares Capital Management LLC. It tracks the NASDAQ-100 Index, but the price of the ETF can vary greatly during the day, where the net asset value of a mutual fund changes only at the end of the trading day.
I don’t want to get too deeply into this, because I already see some eyes glazing over. I know the feeling. For the longest time, I believed the stock market was a three-headed beast that would eat you alive, kind of like King Ghidora. The more I learned about it, the more I understood what kinds of risks I was willing to take. There are people who buy sophisticated software and play the stock market like some teenagers play with their PlayStations and XBOXes. The best way to start is by reading everything you can about the stock market and about trading. I recommend the books by Charles Schwab and The Motley Fool as good books to start with. Regardless of where you are or what exchange you’ll be trading on, the principles in these books will help you.
As I said, I’m hardly an expert on investing and trading stocks, but I’ll bet some of you are, or at least better at it than I am. What books on investing have you read that you would recommend to people who might be reading this? What advice can you give your fellow readers on investing?