Financial articles are often full of technical jargon that makes even my head hurt. I call it “Wall Street-speak,” and I’m sure you know what I’m referring to — terms like “volatility index,” “Dow Jones,” “debt instrument,” and “mortgage-backed security” that make us cough and look the other way.
It really doesn’t have to be that way. One of the principles I’ve built my business on is not using Wall Street-speak, because plain language lets people really understand what they’re getting into.
According to a recent study by MassMutual, only 26 percent of women report they are confident making their own financial decisions, and according to CNN Money, more than half of Americans have $0 in stocks! This is despite the fact that 90 years of data tells us that the stock market offers some of the highest growth investors can expect to achieve in order to build wealth.
So it’s my mission to help you make friends with the stock market in just the three minutes it will take you to read this article. Here we go!
Your Friend Jenny
Imagine you have a friend named Jenny and she owns a flower delivery company. Jenny’s company delivers flowers in your hometown, and she’s done really well! In fact, she’d like to expand and deliver flowers in five more towns.
She has the know-how to create the systems, the buyers, the managers, the hiring process, and everything else she needs.
Except, Jenny needs money to move and expand operations. She needs to rent the warehouses, lease the delivery vehicles, and hire and train the folks who answer the phones.
So she asks you and four other friends to invest in her company. She wants to use your money as “investment capital” to move into these new markets.
And you decide you do want to invest because Jenny’s company has done really well. Now you have a choice:
- You give Jenny a loan — where she’d agree to an interest rate and pay you back a predetermined amount of money.
- Or, you can ask her for some of the upside. You decide you think Jenny’s new endeavor will be profitable, and you’d love to join her as she generates profit.
Taking the Upside
You decide to give Jenny $1,000 of your hard-won savings. Together, you make an agreement that she’s going to keep careful track of the math, and that for every $1,000 of investment capital she receives and invests, she’ll pay you your portion of her profits.
You can either take those profits out of your investment on a quarterly basis, or you can roll them into the original investment, thereby increasing your investment amount.
For example, if in the first quarter Jenny makes $20 of profit for every $1,000 invested, she’ll either pay you the $20, or she’ll mark your investment up to $1,020 on the books.
And then, when you’re done being an investor in Jenny’s flower delivery company, whether because you need the money back to spend it on something, or because Jenny has retired and you no longer think it’s going to be as profitable, you can sell your investment to someone else for what that person is willing to pay at that time.
The Stock Market in a Nutshell
That is exactly what a stock market investment is. By using words like “stocks” and “equities” and “securities,” Wall Street-speak distances you from what the investment actually is.
When you buy stock in a company, you’ve actually lent your hard-earned savings to some entrepreneur and you’ve said, implicitly, “Go make money for me without me having to do anything, and pay me my fair share of that money.”
Pretty cool, right? It can be passive income or it can be passive investment growth, but either way the entrepreneur is doing the work. All you do is save and invest!
That’s why, in my practice, I typically refer to stocks as “the great companies of the world.”
This article was originally published on Hilary’s DailyWorth Connect Platform for Experts October 22, 2015