Bonds, Stocks, ROI: Esquire Money's Rookie's Guide to Investments
“Don’t just save your money, invest it!”
How many times have you heard that before? It’s a very common piece of advice given to people who want to grow their money. Investing your money allows you to put it in vehicles with higher interest rates such as bonds, pooled funds, and stocks in order to have a higher return on investment, at the cost of taking on more risk.
If you didn’t understand some of the words in the previous paragraph, then this article is for you. Here we’ll break down all of the terms you need to familiarize yourself with before diving into investments, and we’ll make them as simple as possible.
Saving vs. investing
But first, let’s go back to the advice above: “Don’t just save your money, invest it.” There are significant differences between saving and investing money, but at the end of it is what happens to your capital.
If you’re leaving your money in a piggy bank, under your bed, or in a regular bank account, then you’re saving it because you’re storing money for future use instead of spending it as you get it. It’s also why the most basic bank accounts are called savings accounts, since it’s meant to keep your money in a safe and secure place.
Investing your money means taking it a step further and allowing it to grow over time. That means putting it in investment vehicles such as bonds, funds, and stocks (which are all explained below), all of which are designed to increase your money’s value instead of keeping it the same.
Risk and return
The reason why putting money in investment vehicles makes it grow is because these vehicles have higher interest rates than regular savings accounts (and your piggy bank). These rates tell you how much your money will grow over a period of time. The higher these rates are, the more valuable your capital becomes after a month or a year.
The money you earn after that period of time is called your return on investment or ROI, and it can either be positive (you gain money) or negative (you lose money). Higher ROI often means the investment vehicle also has higher risk, which is the possibility of an investment not meeting its expected outcome (i.e., losing money instead of gaining it, gaining little instead of gaining a lot).
Saving your money means you have very low risk at the cost of very low return, while investing money means you’re looking for higher returns at the cost of higher risk.
Where to invest
Turns out, answering the question of where you should invest means deciding how much risk you’re willing to take. Each of the investment vehicles have their own interest rates and associated risk, so it’s up to you to find which one is right for you.
Bonds are issued by the government and by private companies when they need to raise money in a short amount of time. The issuers give an interest rate upfront, which means you’ll already know how much you’ll be earning per year with this type of investment. That means your risk is relatively low, which follows that bonds usually have lower returns among investment vehicles.
On the other end of that spectrum are stocks, which represent ownership of a publicly listed company. In the Philippines, these are represented by the over 250 stocks in the Philippine Stock Exchange. Some of these companies are ones you’re probably already familiar with such as the country’s biggest malls, largest banks, most popular restaurants, etc.
Like other products, stocks can be bought and sold, and due to their high volatility (how frequently its price can change), they can be bought and sold at different prices. Earning from stocks is simply selling them at a higher price than when you bought them, but that’s easier said than done. This frequent change in prices means that you’ll be taking on a lot of risk when investing in stocks, but that also means these have the potential to give you the highest returns.
In between bonds and stocks, and even encompassing them, are pooled funds. These are set up by professional fund managers who take in your money, include it with several other investors’ capital, then invests them in bonds, stocks, and other investment vehicles they see fit. In other words, this allows you to invest in different vehicles without having to choose them for yourself, as you’ll be letting professionals do the decision-making for you.
Two of the most common types of pooled funds are mutual funds, which are offered by dedicated companies or subsidiaries of financial institutions, and unit investment trust funds or UITFs, which are mainly offered by banks. From an investor standpoint, they are more or less similar, in that you’ll be investing your capital into a professionally managed fund and getting its returns over time.
There are various kinds of pooled funds, and these are usually categorized by how risky and volatile their investments are. But like before, funds with less risk often have less returns than those with higher risk.
Of course, there’s a lot more that hasn’t been covered, such as specific types of investment vehicles and the different types of investment strategies. With those, there are a lot of comprehensive resources online that can help you better understand them, and all of that research will be very helpful when you’re choosing where to invest your money.
Here’s hoping this is only the start of your financial journey.