What does AGI stand for anyway?

From Ajusted Gross Income to Zero-Coupon Bond.  We've got a robust glossary of financial terms just one click away.  http://www.afn-net.com/glossary.cfm

How Much Do Stocks Cost?

When you think about buying stock, you should remember that there is risk that goes along with it, but there is also opportunity. So if someone asks the question “what are the best companies to invest in,” the answer must take into consideration the amount of risk that investor is willing to take. If the investor says, I don’t want to lose this money to make a fortune, but I really think it’s a great company - there are lots of companies that look promising. Many of them you’ve never heard of, but they believe they’ve got the next newest idea.

Have you ever heard the expression “Time heals all wounds”? When you get older, you’ll have typical grown-up experiences – like with boyfriends and girlfriends. You’ll break up and think the world is coming to an end. But over time, you’ll get over it and your life will get back to normal and things will be OK. Well it’s similar with stocks. If you invest in enough stocks and diversify – buying some companies that are less risky and some with medium risk and some that are real risky – over time it should all be ok. However it's important to remember that diversification doesn't guarantee you will make money and it is still possible to lose money in your investments.

When A Company Needs Money, How Do They Get It?

When a business needs money, they can get it one of two ways. They can sell part of it – or they can borrow. Whey they sell stock, they sell part of the company. But a company may not want to give away ownership of all of the company. They may prefer for you to invest in their company as a bondholder. A bond is a promise to pay off the loan. So if they need money, they may want to borrow it – so they sell bonds – and promise to pay back the loan.

Now, let’s say the company does really well, and the value of the company increases. Does the value of your bond increase? No – because it’s just a promise to repay the loan. But if you own stock in a company, and the value of the company goes up, then your stock is worth more.

What is Compound Interest?

There are two kinds of interest – simple interest and compound interest. You probably know how simple interest works.

For example: If I have $10,000 and I earn 6% interest, how much money do I earn after one year?
Answer: $600

If I earned 6% every year for 12 years how much money would I have earned in interest?
Answer: $600 per year x 12 years = $7200. So adding that to my initial investment, I’d have a total of $17,200

Compounding Interest
If I have $10,000 and I earn 6% compounding interest, how much money do I earn in interest?

Answer: Well, if I apply the “Rule of 72” (which we discussed in our last post) 72 divided by 6 (the rate of interest) = 12. That means my total money will double in 12 years to $20,000.

So why is the total amount of money higher with compounding interest than with simple interest ($20,000 compared with $17,200) if they both receive 6% interest?
Answer: With simple interest I earn the same amount of interest each year on the original $10,000. So every year I only receive $600. With compounding interest, I add $600 (interest) to my original $10,000. Then the next year I earn 6% on $10,600 which is $636. When added together I have $11,236. The following year I earn 6% on that amount

End of year 1 - $600 + $10,000 = $10,600
End of year 2 – 6% x $10,600 = $636. $636 + $10,600 = $11,236
End of year 3 – 6% x $11,236 - $674.16. $647.16 + $11,236 = $11,883.16
End of year 4 – 6% x $11,883.16 - $712.99. $712.99 + $11,883.16 = $12,596.15
End of year 5 – 6% x $12.596.15 - $755.77. $744.77 + $12.596.15 = $13,391.92

Do you see how this is calculated? Dan you continue to do the math?

The Rule of 72 is Cool!

When people invest money, they do it so they can make money. That’s called "getting a return on your investment.” Sometimes they want to know how long it will take to double their investment. To do this, we use the Rule of 72.

Take 72 and divide it by the amount of return on your investment. That is the number of years it will take to double your original investment.

For example: Ten year-old Keanu buys a bond for $10,000 and earns 6%. 72 divided by 6 = 12. So every 12 years, Keanu’s money doubles. When he is 22, he will have $20,000.

What if Keanu leaves that money alone until he retires at 60 years old? His money will double 4 times by then and he will have $160,000.

Let’s say Keanu used that original $10,000 and bought a stock that earns 12% return (72 divided by 12 = 6) he will have $20,000 in 6 years when he is 16. If he leaves that money alone until he retires, it will double 8 times and he will have over $2.5 million when he is 60 years old.

The Rule of 72 is based on a principle called “compound interest” (return), which is sometimes called “The 8th Wonder of the World”! I’ll explain more about compound return in my next post.

Here’s something VERY important to remember. Just because things happened in the past, doesn’t guarantee they’ll happen in the future. So we use historical return rates as an example. It doesn’t mean that if you invest in the stock market today, that you will receive 12% return on your investment every year. Also, when investing in stocks it is possible to lose money, so that the value of the stock could be less than the original investment.