Posts in category Investing Basics →
(This post is a part of the series Basics of Finance and Investing.)
It did not surprise anyone when Warren Buffett, while recently hosting
a group of business students from the University of Pennsylvania’s Wharton School (his alma mater) for a two-hour question-answer session, began by pointing out the folly of the efficient market theory (EMT). After all, his objection to EMT is as legendary as his support for fundamental analysis (FA), as the foundation for smart investing.
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What is a “stock”?
(This post is a part of the series Basics of Finance and Investing.)
Unlike a debt type security such as a money market or a bond, a stock is an equity or ownership type security, which entitles its buyer one share in the ownership of the issuing corporation. Because the risk of investing in a stock is significant (you may lose your entire invested asset if the corporation faces bankruptcy), stocks are examples of a variable income type security.
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What determines the “real” interest rate?
(This post is a part of the series on Basics of Finance and Investing.)
An interest rate is the monthly rate you pay as a borrower, or receive as a creditor/lender. If you save money in bank, or invest in a money market, you are indirectly lending money to a borrowing corporation (or the government). If the interest rate goes up, the borrower must pay you more, which makes them unhappy but you happy (your bank balance soars). The mood swings the other way when interest rate goes down.
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“Real” and “nominal” interest rates
(This post is a part of the series on Basics of Finance and Investing.)
You have bought a 1-year CD for $10,000 at 5% interest rate. After one year you collect $10,500 – a gain of $500. What is your real gain? This depends on what $10,000 can buy one year later, compared to what it does now.
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What is a “bond”?
(This post is a part of the series on Basics of Finance and Investing.)
Like money market, a bond market is a debt instrument issued by both the US government and corporations to borrow fund from public. But there are two differences: a bond market has longer term maturity, and bond returns are not always fixed (and so it is not totally correct to categorize them as fixed-income securities).
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What is a “money market”?
(This post is a part of the series on Basics of Finance and Investing.)
A money market, or “cash”, is a low-risk, short-term, liquid, debt type security. Reading from left to right, the italicized words mean – the risk of losing the principal (money you paid for the security) is low, it matures typically in a year or less, you can sell it quick, and corporations (and the government) issue these securities to borrow funds. Because of the low risk and fixed returns, a money market is an example of a fixed-income security. Following are the three major types of money markets.
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What is a “security”?
(This post is a part of the series on Basics of Finance and Investing.)
Merriam-Webster Online Dictionary defines the word security as “the state of being secure”. Then further down, “an instrument of investment in the form of a document (as a stock certificate or bond) providing evidence of its ownership”. These two definitions are not unrelated. A security is an investment instrument that is supposed to secure your financial future.
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What is a “market”?
(This post is a part of the series on Basics of Finance and Investing.)
In simple terms, a market is where buyers and sellers meet to exchange goods for money. This basic concept still works in the sophisticated world of finance, except that there are now four organizational levels depending on the nature and volume of transactions.
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Finance 101 – who needs it?
How often did you wish your teenager kid were a little more careful with pocket money? Or your parents, who are about to begin their retired life? Or even yourself – maybe fewer of those costly college parties could have helped you pay off your student loan sooner?
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Banks, Investment companies and Investment banks
(This post is a part of the series on Basics of Finance and Investing.)
You and I, as members of the household sector, want to invest our money, whereas the business sector wants to raise money to pay for real assets. Such supply and demand requirements create an atmosphere of synergistic interactions between these two sectors.
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