Newbie 2 Stocks & Bonds?

Question

I am wanting to get into stocks and bonds, however I don't have a lot of money but would like somewhere for my money to gain interest and grow moreso than an average "savings" account. I know a little bit about how to do stocks but bonds I don't. I'm a college student and would like to know which would be better. I read an answer about bonds that helped me out about what it is, its sounds like a certificate of deposit(i know it isn't, but is it comparable?) They were talking about if the interest rate changes and the bond is fixed at a percentage, and the interest goes up, of course money is lost. Is there a bond that allows flexibility with the changing interest rates or is that the whole scheme?
By the way, I've got some money backed away in savings, but how much is usually needed to start out on this stuff(bare min.)? Thanks so much!

Answer 1

There are in fact bonds indexed to inflation and even interest rates. U S treasury for one sells inflation adjusted bonds called TIPS. They are available at your bank or directly from the treasury in $1000 units. Here is a link to learn about them.

http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm


Bond that adjust to interest rates are issued by some corporations and some municipalities. NYC has issued adjustable rate bonds in the past. And I am sure you have heard about the adjustable rate mortgages. These mortages were lumped into bonds which were then sold to investors. They are not doing too well currently.

Bonds in general are sold in $1,000 increments although some preferred stock are actually bonds and are available in as little as $25 increments. EHA is one that falls into that classification.

There are ways for individuals to buy bonds through mutual funds that allow some diversity of investment buy sharing in a broad holding of bonds.

Here is a link to a well reguarded mutual fund that invests in investment grade bonds.

https://personal.vanguard.com/us/funds/snapshot?FundId=0522&FundIntExt=INT

There are also high yield bond funds available that invest in junk bonds, also funds available that invest in foreign bonds.

One thing to be aware of when investing in bonds is that the interest is fully taxable. If you invest in stocks rather than bonds, the dividends generally receive favorable tax treatment and capital gains, if any also receive favorable tax treatment. If you were to buy say a stock such as McDonalds for example, which has had a fairly consistant growth record, and were not to sell it the increase in value of the stock would not be taxed until sold. That is one of the big advantages of investing in stocks rather than bonds. That particular stock has has an annual return of 11.7% during the last 10 years. Some stocks have had even greater returns. But also some have actually declined in value also.

Answer 2

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Answer 3

You may have read my answer about how people lose money on bonds :D If that's the case, I was referring to corporate debt securities, not certificates of deposit. Corporate bonds are where you lend money to a corporation and they pay you interest. CD's are basically a contract where you promise to let the bank borrow your money for a specified period of time, and in exchange they'll give you a slightly higher interest rate than a normal savings account (where you can just take your money out whenever you want.)

Anyways, the bad news is that return and risk are always related. No exceptions. If you want more average return, you have to accept a greater variance in your possible outcomes. This is why United States Treasury debt pays so little (the US government will ALWAYS pay you; they're risk free) and why stocks pay so much (wild swings in value are very common with stocks in the short term.)

If you're concerned about interest rate risk, the best thing to do is buy short-term bonds. If your time horizon is long, you can just keep "rolling over" your money into more short term bonds as the ones you have mature. This way, you're not hurt much if interest rates moved against you (nor are you helped much if interest rates go down, which would actually make your bonds increase in value.) Basically, the longer-term the bond is, the more volitile it is with respect to interest rates. It's also important to realize that you never really take a hit (or realize a gain) in bonds unless you sell your bond early. If you keep it to maturity, you're not really affected by what happens with interest rates.

If you want to invest in stocks, diversify as much as you can. Buy a lot of mutual funds that invest in different industries. Buy some bond funds. Don't try to pick stocks; it's very dangerous and it doesn't work long term. You will generally not beat a diverse portfolio, especially when you factor in transaction costs.

If you don't have much money to get started with, go to sharebuilder.com. You can start investing there with very little cash to get started. Some brokerages will require a minimum amount of $1000 or more.

Answer 4

You don't want to invest in individual stocks and bonds, you want good no-load mutual funds that invest in stock of many companies, or bonds of differing type and maturity date. Growth funds are usually all stock, value funds are funds whose manager's pick stocks of good, sound companies that they feel are undervalued, and balanced or blended funds invest in both stocks and bonds. Income funds are generally bonds and other fixed investments like bank certificates of deposit or money market funds.

At your age, with so many years for your money to work, I would have the majority of my money in growth with the right mix of large, small and medium sized companies (you will encounter the term 'cap' associated with these, it means capitalization, or the amount of money the companies are worth) with some international exposure as well.

Finding the right mix, and 'reallocating' that mix, or re-balancing the various portions so that one doesn't become too dominant (having too many eggs in one basket) is the key. You will need the help of a professional financial adviser until you learn enough to do it on your own.

Talk with several independent financial advisers, ones who don't work for a big name, and avoid any adviser who wants to sell you load funds or annuities, investments with large up-front commissions or sales charges, and sometimes additional charges to get out.

A fee-based adviser gets paid from your investment portfolio, as an annual percentage of the total assets, so the more the person makes for you the more they can make (but the percentage is low - one per cent or less per year), while the commission broker makes money immediately and doesn't have to care if what they put you in makes money - they've already gotten paid. A 5% load fund (pretty standard in the industry) where you start with $1000 puts $950 to work for you and $50 in the broker's pocket. A no load fund puts the entire $1000 to work. After one year at a return of 10% (which would be a decent return, and a fantastic one if you could get that much every year), your no load fund would be worth $1089 after the adviser gets his 1% fee. The load fund would have to return almost 15% in one year to overcome all that extra commission.

By all means, inform yourself about stocks and bonds and how various things in the economy effect their performance, but don't wait until you know to get started. Hire a professional and then keep learning.

Answer 5

Try this web site http://www.fool.com (AKA The Motley Fool)

Don't let the name kid you, they explain where they came up with the name. Additionally, they have been called addressed by congress on several occasions to determine legality of people's investment practices.

They have a very good knowledge base written in terms all can understand.

It worked for me, give it a look. I think you will get some answers. But be prepared, they have a lot to say and they keep it humorous at the same time.

Answer 6

Thanks to the internet it is very easy to do. So much so that most people lose money at first. Check out a few of the discount brokers such as Scottrade, TD Ameritrade, or E-Trade. I would advise you to educate yourself as much as possible before jumping right in. You can start out with as little as $300 at first w/ Scottrade but a diversified portfolio will likely require $2-3K at least. Good luck.