The Building Blocks of an Investment Portfolio
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Opening a savings account with your local bank may provide an easy way to put money away for safekeeping, but the thought of doing more can be tempting.
While your money will earn a small rate of interest with a savings account, you may want to consider an “investing” program that can potentially earn more from the money you put away. If investing is something that piques your interest, but you’re not quite sure where to begin, consider two of the most basic types of investments — stocks and bonds.
In the very simplest terms, a share of stock represents a portion of ownership in a company. While it may seem hard to imagine that you could actually own even a small part of some of the largest companies in business today, that is exactly what owning stock is all about.
When you purchase stock in a company, you literally become a partial owner of that company. Your degree of ownership is calculated on a percentage basis, depending on the amount of stock you hold compared to the total number of shares the company has issued. So, even though your holdings probably represent a very small percentage, the principle remains the same — you are one of the owners, and you have certain rights that come with that ownership.
Stock ownership entitles you to a “share” in the profits of the company – hence the term shareholder. Some companies pay their shareholders a portion of the profits in the form of what’s known as a dividend. If your company pays dividends, these payments — made either in cash or additional stock — are set by the board of directors and are usually issued on a quarterly basis. It is important to remember that these dividends can go up and down; they can even stop altogether if a company decides to stop paying them.
As a stockowner, you also have a right to inspect the company books, and can do so when you review the company’s annual reports. These reports provide extensive details about company operations, allowing you to gain a better understanding of how the business is doing. If you own common stock in the company, you also have the right to vote on important company matters, such as the election of board members or proposed company mergers.
While there are many advantages to owning stock in a company, you should always keep in mind there are also risks of investing your money this way. There is always the possibility that the value of your stock could go down and you could lose some — or even all — of the money you invested.
As a novice investor, another option you should consider is investing in bonds. Simply put, a bond represents a loan. The issuer of the bond receives the money you invest and agrees to repay you at a certain date. In addition, as an incentive to get you to make the loan in the first place, the issuer agrees to pay interest on your investment on a periodic basis. Keep in mind the fact that bonds are subject to market risk and, if sold prior to maturity, may be worth more or less than their original cost.
When discussing bonds, you may hear different terms associated with the price of the bond. Par value, also known as face value, refers to the dollar amount on which a bond’s interest rate is calculated. It also represents the amount that will be paid to bondholders at maturity — the date originally set out for the repayment of the bond.
Many different entities issue bonds as a means to raise funds. Corporations issue bonds as a way to raise money. Municipalities such as towns, cities and even school districts will issue bonds as a way to fund improvement projects. Even the federal government issues bonds on a regular basis.
Stocks and bonds are just two basic ways to get started for those interested in investing. To find out more about the many investment alternatives available to you, consider making an appointment with a financial adviser who can explain all the options available to you.
This article was written by/for Wells Fargo Advisors and provided courtesy of Jonathan Buoni in Northampton, MA at 413-585-1432. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.
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