The Basics

What is a stock market?
A market is where buyers and sellers come together to transact business. A market can be physical or virtual. So, a stock market is a place where people come together to buy and sell stocks.

Why is there a market?
A market exists because companies [Ford, IBM, Walmart, for example] need capital [money] to expand their product lines, for research and development, to move into new markets and for other reasons. To raise the money, these companies sell "shares" or ownerhsip in their companies to investors like you. With this newfound cash they can become better businesses. The companies that assist them in finding this new money are called investment banks. Some of the more successful Investment banks are Goldman Sachs, Merrill Lynch and Morgan Stanely. When a company uses an investment bank to help it raise money, it goes through a process called 'going public' through an Intial Public Offering [IPO].

What is a stock?
A "stock" represents ownership in a company. When you buy stock in a company, you are now a part owner, along with all the other shareholders. The other shareholders can be a 21 year old day trader, a retired citizen or a large mutual fund. As a owner, you will profit when the company is doing well and you will suffer if the company performs poorly.

What is a bond?
A bond is corporate IOU. There is the issuer of the bond, and the holder/buyer of the bond. The issuer is a company that needs money, just like the companies mentioned above. So the company 'issues' or sells bonds to you and the rest of the investing public. When you buy bonds, you are basically letting the issuer of the bonds, BORROW money from you. The issuer promises to pay you back the money they borrowed from you at some specific time in the future. That date is called the bond's 'maturity date'. The issuer also promises to pay you a certain percent on the money borrowed from you, that is called the 'coupon rate'. A coupon rate can range from 1%% to 50% or more! The coupon rate is determined by the faith you, and the rest of the market has in getting your money back. For instance, a high quality issuer, like Walmart can issue bonds and promise to pay bondholders a lower rate like 5%, because there is relatively less chance of them going bankrupt. Amazon.com, on the other hand, has to pay you a high rate of interest to buy their bonds because their outlook isnt as upbeat. So they might pay you 15% on their bonds. Bonds issued by companies like Delta are called high-yield bonds, currently yielding 70% They used to be called 'junk-bonds', but they renamed them high yield. DO BE CAREFUL! Many high yiled issuers DO GO BANKRUPT! So dont be lured in by high-yield bonds or bond mutual funds without doing your homework.

What Is A Money Market?
A money market is a subsector of the bond market. It is made up of short term securities that are very liquid. These are also considered low risk. Some money market instruments include Treasury Bills [issued by the government],CD's [issued by banks, Commercial Paper [issued by corporations], etc.

What is a mutual fund?
A mutual fund is an investment vehicle thay buys securities [stocks, bonds and money markets] and is managed by a professional. There are different kinds of mutual funds that buy different kinds of stocks. Some mutual funds will buy all kinds of stocks, while some mutual funds will buy only certain kinds of stocks [Large Caps, International, Oil stocks, etc.].

A common myth is that mutual funds are 'safer' than individual stocks. This is both true AND false. It's true in the sense because a typical mutual funds holds so many stocks that you are not putting all of your eggs in one basket. You are spreading your risk over all the stocks that are in your mutual fund. Whereas if you had only a couple of stocks in your portfolio, the risk of loss becomes much greater.

Mutual funds are NOT safe in the sense that mutuals funds CAN and DO lose value. Since mutual funds buy stocks, mutual funds do lose value when the overall market starts to fall. Some mutual funds are 'riskier' than others. Funds that hold short term money market instruments are the safest and certain internet funds are the riskiest.

Load and No-Load Mutual Funds
Some mutual funds charge a fee called a "load". This fee ranges between 3% and 8% of the dollar amount you put into that mutual fund. The average load/fee is 5%. So, if you had $10,000 to invest in a mutual fund that had a 5% load, the fee would be $500. In effect, you would only be investing $9,500 after the load. This load is paid to brokers that help investors pick mutual funds. There are funds called "no-load" funds, and these funds do NOT charge an up-front fee. More of your money is going to work for you in a no-load fund. If at all possible, you should ALWAYS buy no-load funds.

What is a Stock Split?
A stock split is a transaction, initiated by the company, that reduces the share price of the stock and simultaneously gives you more shares. The net effect for you is zero! It is done to make the share price more attractive and affordable to a wider audience of investors. Take a look at a company that doesn't have any stock splits, Berkshire Hathaway. Berkshire's share price is currently $60,000! That's right ONE share is $60,000. Most other companies would have a similar high stock price if they had not 'split' their shares. Berkshire keeps its stock price high because they want to attract a certain kind of 'professional' investor, mostly big institutions that are not as quick triggered as the small investor.

Lets take a look at an example. Lets say you bought 100 shares of Ford Motor Company. Right now my shares are worth $50. So, your net worth is: 100 shares x $50, or $5,000. Now, Ford announces a 2 for 1 stock split, meaning for every 1 share you already have, Ford will 'split' it to give you 2 shares. You feel richer already, right? Not so fast; although you have twice as many shares as before, each share is now worth $25. So, your new net worth is 200 shares x $25 = $5,000. You are not any richer yet, but what sometimes happens is because the shares have gone from $50 to $25 more people can afford to buy the shares and hopefully the new buying will drive the price up

What is the Nasdaq, the Dow Industrials or the S&P 500 Index?
All of these are simply called indexes, or indices. They are stock market averages used to report how stocks are doing in general.

What is an Annuity?
An annuity is a combination mutual fund/insurance product wrapped into one. Annuities are retirement products offering investors a choice of mutual funds to invest in. One advantage is the death benefit. Also, there is no limit on the amount an investor may contribute and the annuity grows tax-deferred until withdrawn. But some disadvantages include fees that are higher than investing in mutual funds directly. And for some, the ordinary income tax that is imposed on withdrawals may be higher than the long term capital gains tax a mutual fund might incur.
Annuities are not for most people, but for a small portion of investors annuities might be a good choice.