When it comes to investing and financing, I know very little. Be that as it may, had I been trying to write about a slightly different topic from my usual trend. At least for my last post of 2018 that is.

In the following, I will be tackling elementary terms and concepts most commonly used in investing. My focus will be on the well-known 401K plan.

 

For starters, let us define what the 401K plan is. In simple terms, it is a retirement savings plan sponsored by an employer. It allows workers to save and invest part of their paycheck before taxes are deducted from it. Thus, it is imperative for employees to have a solid foundation of how to properly manage their financial resources available. In other words, how to invest that particular part of their income wisely. Now that the aforesaid concept has been taken care of, let us move on to the simple terms: Stock, bond, and cash.

 

To start with, we will be addressing stock. It mainly means ownership in a company. More specifically though, "part of the ownership of a company that can be bought by the public". Among the major ways to classify stock we have: Size or market capitalization (cap) and company location. It goes without saying that each classification has its own level of risk. As you may also know, if the value of the company increases, the stock price rises and vice versa. It is also worth noting that a company can share its yearly profit in the form of a dividend. On the other hand, we have bonds. A bond is, in simple terms, a loan to a company or government. They borrow by selling a bond, which is a promise to repay the buyer in a fixed number of years at a fixed interest rate. Case in point, when the US government borrows money, it does it from its citizens. Through the investments they make in bonds that is. If interest rates drop after you buy a bond, its value rises. When the opposite happens of course, the bond's value decreases. How much the value of the bond will change depends on how  long it is. The longer the bond, the more risk you will take. Still and all, bonds are considered less risky than stocks. Lastly, we have cash. There is little risk that this asset will lose value. Notwithstanding. holding too much money can lead to it losing part of its worth. Cash loses value over time. For instance, in 1950 you could actually purchase a Coke for 5 cents. However, today you can barely buy anything with such small amount of money.

 

Hopefully, I have shed some light on this issue. Something I neglected to mention earlier was that most people with 401K plans invest in mutual funds. "A mutual fund is a service where financial experts invest the money of several people in many different companies". Bear in mind also that in order to invest well, you need to diversity. In other words, have several different options available.

 

Sources:

- Smart Investing Trends YouTube Channel.

- Cambridge Dictionary.