Finance concepts made simple

Aug 20, 2020 2 min read
Finance concepts made simple

It is my opinion that finance terminologies are crazy over complicated for what they are and the system and people working for it make more difficult than what they are for x reason... Here are some good terms anyone into finance should know.

Stock and Bonds

Stocks will outperform over the long term
From Buffett: It's been idiotic to buy long bonds
Stocks Bonds
Makes you an owner
Makes you a lender
You claim part of a company's assets + earnings
You earn interest
No guarantee to get money back Payment due to you on date of maturity

Index Fund vs ETF vs Mutual Fund

Index Funds are a type of Mutual Funds
All index funds are mutual funds, but not all mutual funds are index funds

Chronological order of creation: Mutual Fund -> Index Fund -> ETF

Index Fund ETF (Exchanged-Traded Funds) Mutual Fund
You can own multiple stocks by buying 1 index fund
You can only buy shares once a day
You can own multiple stocks by buying 1 index fund
You can buy/sell shares whenever the stock market is open
ETF is not really a stock but you can buy as if it were a stock
It trades like a stock so you can watch it go up and down,
so it's added temptation to sell, not a good long term strategy
You can own multiple stocks by buying 1 mutual fund
Diversification Diversification (90 stocks at a minimum)
Passive managed, which eliminates the need for
active management. For example the S&P 500 Index.
Since this index fund only buys whatever index it's on there,
and you're not paying someone to oversee it, the fees
are much much lower as 0.04%
Same as Index Fund
Managed by investment professionals
They charge fees (called active management)
Automatic reinvestment from your checking account Not Automatic investment

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