Money Market Accounts and Stocks
Money Market Accounts (MMAs)
These accounts are designed to be a combination of the features of a classic savings account and a CD. Some typical features include:
Higher interest rate than c • lassic savings accounts
• No maturity date as with a CD
• A minimum balance that must be maintained (e.g., $2,500)
• Limited withdrawals each month (typically up to six transactions per month)
Do not confuse bank MMAs with the similarly named accounts offered by investment firms. They arevery different. Bank MMAs are another form of savings account and carry the federal insurance, currently up to $250,000 per depositor, which all other deposit accounts enjoy. The similarly named product offered by investment houses is typically a short-term investment in one or more mutual funds that may or may not generate positive earnings. There is also no federal insurance protecting your principal (investment). When you have one of these savings accounts, you are really “loaning” your financial institution your money. In return, the bank or credit union pays you interest for making these loans. Unlike most loans, however, you are usually guaranteed repayment; even if your institution fails. In case of the bank’s failure, the free federal insurance you receive covers the loss.
Stocks
Stocks are equity investments, which means that buying even one share of a company’s stock means you are a part-owner. For example, if you own one share of Apple, Inc. (AA PL) stock and Apple has 100,000,000 shares that are “issued and outstanding,” then you own .000001% of the company. If Apple were then to be sold to XYZ company for $50,00,000,000 then you would receive $50 for your share. So, as a stock owner, you are really becoming a business owner. And what do business people care about? That’s right, you guessed it: maximizing sales and minimizing expenses. This equals increasing profits and making money! Therefore, the price of a stock is generally dependent on a combination of current profits and expected future profits of that business.
When business is good and companies are making lots of money, the prices of stocks generally rise. The opposite is also true; as businesses do poorly, their stock prices decline. The place where you can buy or sell shares of stock is called a stock exchange. In the U.S. there are two major exchanges: the Nasdaq (originally NASDA Q, an acronym for the National Association of Securities Dealers Automated Quotation) and the New York Stock Exchange (NYSE ), famously located on Wall Street in New York City. (A third, the American Stock Exchange or AMEX, was acquired by NYSE
Euronext and merged in 2009.) Exchanges play a key role in the financial markets. When a company raises money in a stock offering it sells shares directly to the initial investors. But when those investors no longer want to hold shares, the exchanges provide a place where buyers and sellers come together to buy and sell shares. This is called liquidity.
If you owned 1,000,000 shares of Apple Inc. (AA PL) but you couldn’t find anybody willing to buy it, then it would really be worthless. But if you knew you could call your broker, who could send an order to an exchange where all of the buyers would be standing by, then you would be confident that your shares would be sold to the highest bidder. The exchanges provide this liquidity, helping to ensure that sellers get the highest price possible, and buyers get the lowest price possible. Investors can make money with stocks two ways: through the rise in price of a stock
• through the dividends that companies give to shareholders
Companies that have stable earnings and are generating more cash than is needed to fund additional growth opportunities pay out part of their reserves every three months as “dividends.” It is a direct cash outlay per share owned. Companies will actually send you checks in the mail for owning their stock! Or if you prefer, larger companies will even take that cash dividend that they would normally pay you and buy you additional shares of the company. This way your 100 shares of Apple stock will grow over time based on the cash dividend amount and the price of the stock when the dividend is paid. And yes, you will end up with fractional shares.Over long periods of time, stocks have proven to be a very valuable investment because of their very good returns. Over the last 100 years, stocks have gone up, on average, about 6% per year. As you are probably aware, the prices and values of stocks are volatile.
Some change dramatically and rapidly (for better or worse) while others can remain stable for long periods. Unlike most bank checking and savings accounts, investments in stocks are not guaranteed by the FDIC . Many people are afraid to start picking individual stocks, and would rather pay money managers on Wall Street to invest for them. In the United States, over $1.7 Trillion is invested in mutual funds.
These accounts are designed to be a combination of the features of a classic savings account and a CD. Some typical features include:
Higher interest rate than c • lassic savings accounts
• No maturity date as with a CD
• A minimum balance that must be maintained (e.g., $2,500)
• Limited withdrawals each month (typically up to six transactions per month)
Do not confuse bank MMAs with the similarly named accounts offered by investment firms. They arevery different. Bank MMAs are another form of savings account and carry the federal insurance, currently up to $250,000 per depositor, which all other deposit accounts enjoy. The similarly named product offered by investment houses is typically a short-term investment in one or more mutual funds that may or may not generate positive earnings. There is also no federal insurance protecting your principal (investment). When you have one of these savings accounts, you are really “loaning” your financial institution your money. In return, the bank or credit union pays you interest for making these loans. Unlike most loans, however, you are usually guaranteed repayment; even if your institution fails. In case of the bank’s failure, the free federal insurance you receive covers the loss.
Stocks
Stocks are equity investments, which means that buying even one share of a company’s stock means you are a part-owner. For example, if you own one share of Apple, Inc. (AA PL) stock and Apple has 100,000,000 shares that are “issued and outstanding,” then you own .000001% of the company. If Apple were then to be sold to XYZ company for $50,00,000,000 then you would receive $50 for your share. So, as a stock owner, you are really becoming a business owner. And what do business people care about? That’s right, you guessed it: maximizing sales and minimizing expenses. This equals increasing profits and making money! Therefore, the price of a stock is generally dependent on a combination of current profits and expected future profits of that business.
When business is good and companies are making lots of money, the prices of stocks generally rise. The opposite is also true; as businesses do poorly, their stock prices decline. The place where you can buy or sell shares of stock is called a stock exchange. In the U.S. there are two major exchanges: the Nasdaq (originally NASDA Q, an acronym for the National Association of Securities Dealers Automated Quotation) and the New York Stock Exchange (NYSE ), famously located on Wall Street in New York City. (A third, the American Stock Exchange or AMEX, was acquired by NYSE
Euronext and merged in 2009.) Exchanges play a key role in the financial markets. When a company raises money in a stock offering it sells shares directly to the initial investors. But when those investors no longer want to hold shares, the exchanges provide a place where buyers and sellers come together to buy and sell shares. This is called liquidity.
If you owned 1,000,000 shares of Apple Inc. (AA PL) but you couldn’t find anybody willing to buy it, then it would really be worthless. But if you knew you could call your broker, who could send an order to an exchange where all of the buyers would be standing by, then you would be confident that your shares would be sold to the highest bidder. The exchanges provide this liquidity, helping to ensure that sellers get the highest price possible, and buyers get the lowest price possible. Investors can make money with stocks two ways: through the rise in price of a stock
• through the dividends that companies give to shareholders
Companies that have stable earnings and are generating more cash than is needed to fund additional growth opportunities pay out part of their reserves every three months as “dividends.” It is a direct cash outlay per share owned. Companies will actually send you checks in the mail for owning their stock! Or if you prefer, larger companies will even take that cash dividend that they would normally pay you and buy you additional shares of the company. This way your 100 shares of Apple stock will grow over time based on the cash dividend amount and the price of the stock when the dividend is paid. And yes, you will end up with fractional shares.Over long periods of time, stocks have proven to be a very valuable investment because of their very good returns. Over the last 100 years, stocks have gone up, on average, about 6% per year. As you are probably aware, the prices and values of stocks are volatile.
Some change dramatically and rapidly (for better or worse) while others can remain stable for long periods. Unlike most bank checking and savings accounts, investments in stocks are not guaranteed by the FDIC . Many people are afraid to start picking individual stocks, and would rather pay money managers on Wall Street to invest for them. In the United States, over $1.7 Trillion is invested in mutual funds.
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