Following the additional details on savings, here is a bit more on investing. In the below I expand on what is an investment, what is an asset, the types of assets, investment versus speculation, and the rule of not losing money.
My opinions on investing may not match with yours, so here is a little more on my thoughts about investing before jumping into the note.
Borrowing from the Oxford Dictionary, investing is the “[expenditure of] money with the expectation of achieving a profit or material result by putting it into financial plans, shares, or property, or by using it to develop a commercial venture.” To this I would emphasize the idea of an expected return, as well as add “return of principle.” This helps us draw the important difference between investing and speculating. It also helps define a true asset and differentiate between investing and speculating. For example, someone who buys a personal residence and expects it to go up is speculating, while someone who purchases a home and rents it out, assuming they conducted a proper analysis and will receive rental income each month, is investing. Hopefully the below note is helpful in introducing the concept of investing to your own children.
Dear Ney Ney,
Today is the day you will begin to learn about investing.
Investing means buying investments. Different people have different definitions for the word “investment,” but I want you to think of an investment as an “asset.” Like the word investment, people also think different things when they here the word asset, but I want you to think of an asset as something you expect will increase in value and regularly pay you money. So investing means buying assets.
People usually put assets into two groups, or classes: physical assets and paper assets.
The easiest physical asset to understand that people invest in is real estate. Real estate means houses, apartment buildings, shopping malls, storage units, and even just plain land.
When you invest in real estate, you buy property that other people pay you a monthly fee, called rent, to you. The money you earn is called rental income. If you buy the right real estate, it will increase in value, or appreciate, and you can sell it in the future for more money. Real estate normally appreciates because more people decide they want to live in an area, and are willing to pay more money in order to live there.
Paper assets are called paper assets because many years ago when you bought a paper asset you received a piece of paper as proof that you purchased it. A very common paper asset is a share of stock in a company.
A share of stock represents a very small amount of ownership in a company. The name share comes from ownership being shared among many different people. People who own stock are also called shareholders.
Some, but not all, companies give their shareholders a payment every three months. This payment is called a dividend, and it comes from the money that the company makes, called profits.
Like real estate, you buy stock in companies that you think will appreciate. The price of a share of stock is mostly based on how much people think the company will earn in the future. People learn about the company and if they think the profits of the company are going to increase they are willing to pay more for a share of stock in the company.
Investing sounds complicated, but it can be very simple, too. Now that you understand the basics we can talk more about investing in the future.
I love you.
Dad
