Sample Chapter of The Cats of Laughing Thunder: Guide for Kids and Money
Posted on September 27 2018
“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffet, famous investor and Chairman of Berkshire Hathaway, bought his first stock when he was an 11-year-old
Next up on the investment list are stocks.
Yolanda is also thinking about investing in stocks.
A stock is a small piece of ownership in a company.
There are two ways to make money from owning stock:
First, the company may pay stockowners a portion of its yearly profits. Those payments are called dividends.
Second, the company may increase in value. This means your stock will increase in value. If this happens, you could sell the stock for more money than you paid. The profits from selling your stock are called capital gains.
There are two ways that you can buy stocks – individual stocks and stock funds.
You can buy the stock of an individual company. But there are risks to owning the stock of only one company, even if you research the company carefully. For example, if something bad happens to the economy, the stock of the one company you own may go down more than the stocks of other companies.
To be safer, you might decide to invest in a stock fund. In a stock fund, you and other investors pool your money and buy stocks (or shares) in a number of companies.
Owning the stocks of many companies is called diversification. This is an important way to reduce risk.
Two of the most popular types of funds that you can buy are exchange traded funds and mutual funds.
In an exchange traded fund, the fund manager is usually only allowed to buy the stocks of companies in a particular stock index. An example of a stock index is the Dow Jones Industrial Average, also known as the Dow. The Dow contains 30 large companies such as Apple, Walt Disney, McDonald’s, and Coca-Cola.
In a mutual fund, the fund manager is usually allowed to buy the stocks that he or she thinks are better than other stocks.
Both types of funds charge you a small amount for management expenses. These expenses are usually a bit lower for an exchange traded fund.
If you’re a beginner at stock investing, you should get advice from your parent(s) or guardian(s).
Never invest your money in something that you don’t understand. Let’s say that again. Never invest your money in something that you don’t understand. Get educated so that you can be a smart investor!