Tuesday, November 10, 1998
Take the plunge
FINANCE: Students with money to burn are investing it in hopes
of generating
more money
By Andy Shah
Daily Bruin Contributor
For many young adults, depositing a paycheck into the bank gives
them a feeling of security. But instead of letting the money sit
there and collect interest, some opt to take their money out of the
bank and invest it.
For many students, investing can be especially rewarding if they
start young, because long-term investing tends to yield more
profits.
Investment options include the stock market, bonds and mutual
funds, among others.
One is advised to consult an investment specialist before
investing.
Stocks
A share of stock represents owning part of a company. A company
issues stocks to raise money for its business.
Since 1926, stocks have outperformed all other asset classes,
according to John Hancock Funds, an investment management company.
Investors who endure stock market fluctuations have earned more
returns than those who invested in bond and cash equivalents.
But with every profit, the risk of loss is always prevalent.
Investing in stocks always contains risk, said David Ravetch, a
professor at the Anderson Graduate School of Management.
"The stock market does involve risk, but it’s hard to predict,"
he said. "Sometimes it goes up, sometimes down."
Stocks can cost any amount, usually determined by the market
value, or what investors are willing to pay for the stock. A
stock’s price may also move down in anticipation of some future
event.
According to John Hancock Funds, a stock’s value can be measured
by return, which is the difference between what you paid for the
share and what you sold it for, plus any dividends you receive.
Tracking the ups and downs of the market is done by many
indices, the Dow Jones Industrial Average (DJIA) being one of the
most popular. The DJIA tracks the price movement of the stocks of
30 established companies listed on the New York Stock Exchange.
Other indices include the Standard & Poor’s 500 Index (S &
P) and the NASDAQ composite.
So why would anyone want to invest in stocks if there is a
higher risk involved?
One reason is to stay ahead of inflation.
Inflation causes the increase of prices. When the price of a Big
Mac goes up from $1.20 to $1.50 or when gas goes up from $1.30 to
$1.70 a gallon, one needs to make more money just to keep up with
the rising cost of living.
Also, a long-term plan could yield great returns for young
investors.
According to John Hancock funds, when held for a 15-year period,
stocks have provided a positive total return 100 percent of the
time.
Compare that to a one-year holding period, which had 50 periods
of positive returns and 20 periods of negative returns.
But because many young people are strapped for cash, investing
can seem like a daunting and impractical task. But even a little
bit of money invested can yield benefits in the future, Ravetch
said.
"You don’t have to invest a lot of money all at once to see
rewards," he said.
Although there is no set time when one should start investing,
it is usually accepted that the sooner you start, the sooner you
can reach your financial goals.
A small amount of money invested, given time, can grow to a
large amount of money.
Another advantage of stocks is that a stockholder has a voice in
the company. For example, as a shareholder of Microsoft, every year
you’ll be invited to attend the annual shareholders’ meeting, where
you can ask Bill Gates questions about Microsoft.
Mutual Funds
A mutual fund is a pool of a group of investors’ money used to
purchase a variety of investments.
There are many different types of mutual funds, such as stock
mutual funds, bond mutual funds, money market funds, gold funds,
global mutual funds and real estate investment trusts.
Mutual funds are attractive to many because they are diversified
investments.
"With mutual funds, you’re putting your money in many different
investments, instead of just one," Ravetch said.
Also, mutual funds are managed by professional money managers,
whereas stockholders often have to keep track of their own
stocks.
Most mutual funds charge management fees from 2 to 4 percent
(loaded funds), but there are also no-load mutual funds.
The performance of a mutual fund is highly dependent on the fund
manager. Most mutual funds have not done as well as the S & P
500 index, an indicator of the stock market.
According to Lipper Analytical, only 33 percent of the mutual
funds beat the S & P 500 index in the last 35 years. In the
last 10 years, only 21 percent the of mutual funds beat the S &
P 500 index.
There are thousands of mutual funds to suit each individual’s
investment objectives.
Bonds
According to John Hancock Funds, a bond is a loan in which the
bond buyer lends money to the bond issuer.
Individual bonds offer a steady and fixed stream of interest
income, and are usually issued by corporations and governments.
For example, if you buy a 15-year corporate bond, the
corporation therefore agrees to pay you the interest on the money
they borrowed from you.
The corporation also agrees to repay the principal in full on a
specified date 15 years from the time of purchase.
Bonds are a good source of income for when one gets older.
Instead of letting money sit in a bank, some opt to put it into
a bond, which offers a source of income for such people as
retirees.
Investors expect bonds to be safe investments, depending on the
bond issuer’s credit strength. Also, high-quality bonds are
considered safer investments when compared to stocks.
As with any investment, there are risks involved. If one invests
for a long period of time, the bond’s value can be influenced by
many events, including inflation. So a long-term bond will
experience more price changes than a short-term security.
While investing is a game of chance and involves adequate
preparation and research, it is a good way for young people to sink
their teeth into financial security at an early age.
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