Money Coach Offers Tips on Investing
MICHEL MARTIN, host:
Graduation season is here and many young people will be striking out on their first jobs. And despite the tough economic times, some young people are still earning good salaries. So that made us think, now that you've got your BA or your MA, or whatever else you got, have you thought about the ABCs of investing that hard-earned cash? Who better to ask than our money coach Alvin Hall with our month-long series Investment 101. Hi, Alvin, welcome back.
Mr. ALVIN HALL (Money Coach): Thank you. I'm glad to be back.
MARTIN: Now first of all, Alvin, when you talk about investments, you don't mean I want to invest in a new handbag. That's not what you're talking about.
Mr. HALL: No. I'm going to invest in a new coat! Well, no. I'm talking about buying securities, stocks, bonds - assets that will hopefully grow over a period of time and help you achieve some long-term financial goal.
MARTIN: What is a stock?
Mr. HALL: When corporations want to raise capital they will issue common stock to the public, and if you are an investor you can buy that stock. The shares fluctuate with the fortunes of the company. As the company does well, the shares will go up over a period of time. As the company does badly, the common stock will decline.
MARTIN: So how do you actually make money from stocks?
Mr. HALL: Well, you make money two ways with common stock. Many common stocks pay dividends. And every quarter they'll declare a dividend amount, and you will receive that as a check. Many people will receive dividends. Especially when you're young, the advice is to reinvest those dividends in those company shares, so that your proportion of the share of ownership actually goes up. The second way you make money is through capital appreciation. You buy the stock when it's low, and it goes up over a period of time.
MARTIN: Why do stock prices fluctuate?
Mr. HALL: What drives the price of a stock to move up and down everyday are three expectations: One, expectations about a company's future earnings. A second factor is any rumor in the market. Any bad news or controversial news about the company will affect its price and make some people want to buy or sell that share. And the third item is simply the information that's out there in the market about that company, whether or not sales are going well, whether or not somebody's heard they're about to sign a good deal. All of that can influence a company's share price.
MARTIN: Now, you know, I think some people shy away from investing in stocks because they think it is gambling. How can you sort of get your head around investing as opposed to gambling?
Mr. HALL: I think that you have to look at the type of company in which you're investing. Typically if you're starting out, you want to go after the blue-chip companies. Those companies that have been around for a long period of time, companies that have paid a regular, relatively steady dividend, and they've shown some price appreciation over the long run.
MARTIN: Well, let me just ask you this though. Do you really recommend that people who are new to this game buy individual stocks?
Mr. HALL: No. I don't think it's really the best way to go because to do the research to buy individual company stocks takes really a lot of time. The easiest way to do it is to buy a stock mutual fund.
MARTIN: And what's that?
Mr. HALL: A mutual fund is an investment pool where a fund manager or portfolio manager has taken money from many, many different people, and put the money into the pool, and then invested it in shares according to an investment objective. This investment objective could be to generate income, growth. A wide variety of investment objectives. And the reason investing in a mutual fund is good for a beginning investor is because, one, you get access to professional management. Two, you get diversification, because most of these portfolios are so large that they're really diversified over different industries, different sectors. It's really good. And then the third advantage is lower costs. Typically when people invest in a mutual fund, the overall cost of investing is much less than buying individual shares.
MARTIN: How do you go about selecting one?
Mr. HALL: The key thing to do is to go to a service called Morning Star. Morning Star, which is a Chicago-based company, actually rates mutual funds according to a five-star rating. There are three key things that a person should look at. One, you want to look at the return over three, five, and ten years. You want to look for a mutual fund that has had top ratings during that period of time.
Next, during the time that it earned that high return, you also want to make sure that the investment manager or portfolio manager was there during that time. And the third thing you want to look at is how has the mutual fund done when the market has gone down? It'll give you a sense of what is your risk of loss.
MARTIN: Now, a lot of people, if they work for a big company, might have the opportunity to buy company stock through payroll deduction or something like that. Or they might even have mutual funds as part of their 401(k) plan or something like that. Do you recommend that people invest in these automatically, or should you apply the same standards of due diligence that you would for anything else?
Mr. HALL: For mutual funds in a 401(k) plan, I still thing you should consult Morning Star before you make your final decision. But most 401(k) plans offer some matching or some advantage that everybody should take advantage of. I think when you get your first job, or any job, and a company offers you a 401(k) plan, and you've done your work, definitely invest money there because you're putting money in with pretax dollars and reducing your overall tax liability.
Company stock now, that's a little bit of a different issue. Always diversify. You don't want to have so much of your money in your company's stock, no matter how good it is, that if the company stumbles and goes bankrupt, that your financial security for the future is hurt.
MARTIN: OK. What do you want to talk about next week?
Mr. HALL: Next week I think we want to look at bonds. I think for people who may not have the stomach to deal with the ups and downs that are implicitly part of the stock market, maybe fixed-income securities - like U.S. government bonds or tax-free municipal bonds - are something that they should consider.
MARTIN: All right. Our money expert Alvin Hall joined us from our New York bureau. Thanks, Alvin.
Mr. HALL: Thank you.
MARTIN: And that's our program for today. I'm Michel Martin and this is Tell Me More from NPR News. Let's talk more tomorrow.
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