FB1 Basic Concepts

MrSinatra’s Finance Bible

What everyone should know about getting wealthy 💲

Glossary of Terms
(in case one is used you aren’t familiar with)

Basic concepts: 

Personal investing is the practice of purchasing a slice of ownership in a company via stock. Ownership in publicly held companies are “traded” on public exchanges (like the New York Stock Exchange, or NASDAQ, etc) where buyers and seller's transactions set the market price.

When investing in a public business, buyers use a brokerage (like Vanguard) to purchase stock, or “shares” of that business. For example, if a company is represented in the market by 100 shares of stock, and you buy 4 shares, you own 4% of that business. If each share is worth $10, then you have $40 worth of stock and the company has a “market cap” of $1,000.

When you invest your money in a company, it means you are a partial owner of that company, and entitled to a return on that investment. Hopefully, over time, you will see the share price increase as the company becomes bigger and more successful.

Dividends: 

Many companies will offer a “dividend” which is a partial payment (typically of some of the company's profits) to shareholders, and generally are paid quarterly, (e.g. March, June, Sept and Dec); but the schedule can vary greatly, meaning both frequency of payment, and schedule of recurrence.

Smart investors take any dividends, (and / or separately any “capital gains,”) and automatically reinvest it, which means the money / payments are used to buy more of the same “security.” Over a long enough time, this works in a similar way to compound interest, which generates exponential returns.

So in our example above, if that company paid a one time annual 25% dividend (which is not common in the real world, unfortunately) you would get a $10 dividend payment, or return, on your $40 investment. That $10 would then be automatically used to buy another share of the business, so now you would have 5 shares; or put another way a $50 stake, and ergo 5% of the business.

Each year then, your buying power increases, as a result of the “reinvestment” of the dividends and / or any other payments. This is known as a “DRIP” strategy, and is key to building wealth. More on DRIP.

Value vs Growth: 

Stocks are generally categorized as either Value, or Growth.

Value stocks typically represent mature, established companies that are no longer growing at a fast pace, but have stable prospects.

Growth stocks are typically newer companies that are growing in size, market share, and earnings at a fast pace, and as such, they typically cost more b/c people are hopeful as to their future prospects, but they are riskier and not as stable.

(Higher risk can = higher reward, but there’s a reason its categorized as higher risk... its riskier! Generally speaking, this means its more likely to lose you money, than a value based investment.  This kind of gamble is sometimes called "speculation")

Company Size: 

As alluded to earlier, the financial size of a company, aka market capitalization, is determined by its share price, times the total amount of shares in the marketplace.

So repeating our earlier example, if a share is worth $10, and there are 100 shares representing the company total, and an investor buys 4 shares, then they have $40 worth of stock, or a 4% ownership stake in a company that has a total “market cap” of $1,000.

A company's stock is considered either a small cap (generally worth under $2 billion total), a mid cap, ($2 billion to $10 billion), or a large cap, (over $10 billion). Each brokerage determines the specific range, but thats the general rule of thumb.

Typically value stocks will have higher market caps, whereas growth stocks will have lower caps.

Bonds: 

Another investment option, bonds are issued for sale when a company (or gov’t entity) wants to raise cash for itself via issuing debt.

Companies (or gov’ts) are borrowing the investor’s money, and agreeing to pay it back with interest. The bond itself is a contractual commitment from the issuer (of the bond) to pay the investor (aka bond holder) a certain interest rate, usually monthly.

Bonds issued by gov’t are usually safer and tax free, but pay a lower rate. The rate of any bond might be tied to the variable prime interest rate, but not necessarily. The riskier the bond issuer, the higher the rate paid. ‘Moodys’ is a well known appraiser of bond ratings, a scale that indicates the likelihood that the borrower actually pays the bond off.

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