Investing Basics: Budgeting and Financial Security

• Technically, anyone with a bank account can invest, but most services require a minimum age of 18 due to KYC (Know Your Customer) requirements.
• Those under 18 typically need parental permission to invest.
• There is no upper age limit to investing, and profitable income can still be made with steady and wise investing habits which can include keeping as much money in your emergency fund as possible
• Beginners shouldn't invest money they can't afford to lose, and should never put their financial future at risk.
• Creating a personal budget to understand assets, liabilities, and disposable income is vital before starting to invest.
• Financial security can be achieved by creating a budget, avoiding debt, and maintaining an adequate emergency fund.

Key Concepts

• Banks offer checking, savings, and certificates of deposit (CDs), with deposit insurance provided through a federal program.
• Bonds promise payments over time based on the interest rate at issuance, with repayment of the borrowed amount.
• High-yield or junk bonds offer high returns but have a higher risk of default.
• Diversification means investing in a range of companies to mitigate the risk associated with investing in a single firm.
• Mutual funds purchase an array of stocks and/or bonds, with investors receiving returns based on the fund's overall performance.
• Index funds are a type of mutual fund that aims to replicate the overall behavior of the stock market.
• Housing and other tangible assets can be considered financial investments that provide a return through capital gains, and housing can offer the nonfinancial return of somewhere to live.

Key Terms

• actual rate of return: Total return, including capital gains and interest, at the end of a period.
• bond yield: Expected rate of return at the time of purchase.
• certificate of deposit (CD): A savings mechanism where funds are deposited for a fixed term in exchange for a higher interest rate.
• checking account: A bank account that provides easy access to money via checks or debit cards, typically with little to no interest.
• coupon rate: The interest rate paid on a bond, either annually or semi-annually.
• debit card: A card for making purchases, with the cost immediately deducted from the checking account.
• diversification: Investing in a wide range of companies to reduce risk.
• equity: A homeowner's monetary value after selling the house and repaying loans.
• expected rate of return: Anticipated return on an investment through interest, capital gains, or increased profitability.
• face value: The amount the bond issuer agrees to pay the investor.
• financial intermediary: An institution like a bank that connects savers and borrowers.
• high yield bonds: Bonds with relatively high-interest rates to compensate for their high risk of default.
• index fund: A mutual fund that mimics the overall performance of the market.
• liquidity: How easily money or financial assets can be exchanged for goods or services.
• maturity date: The date a bond must be repaid
• mutual funds: Funds that diversify investments by buying a range of stocks or bonds.
• savings account: A bank account that pays interest, but withdrawals may require a bank visit or ATM use.
• junk bonds: bonds with a low credit rating and high risk of default.

Mutual Funds

• Mutuaeducing risk for investors.
• Investors in mutual funds share in the fund's profits and losses.
• Index funds and ETFs are types of passive-investing mutual funds, while actively managed mutual funds are managed by fund managers.
• Actively managed funds aim to outperform the market, while passively managed funds aim to simply match the market's performance.
• Mutual funds offer choices between stock funds, bond funds, and balanced funds, as well as more specific funds like sector funds and growth funds.
• Actively managed funds may have higher management costs and fees.
• Many mutual funds require a minimum investment ranging from $500 to $3,000, though some funds have no minimum.
• Both mutual funds and exchange-traded funds (ETFs) are baskets of assets that offer investors a way to diversify
• Some mutual funds are open-end while some types of mutual funds trade on the stock market like ETFs. These are called closed-end mutual funds.
• ETFs are more likely to be passively managed and often track a particular market index.
• ETFs are traded in the same way shares of a stock in an individual company are traded and their price is determined by market forces.

Stocks

• Stocks, also known as "equities," are securities representing a share of ownership in a company.
• Stock represents the original capital paid into the business by its founders, purchased in the form of shares.
• Shareholders have the preemptive right, which gives them the first chance to buy newly issued shares of stock before the general public.

Key Terms

• stock: Represents original capital paid into a business.
• common stock: Security representing ownership in a corporation.
• preferred stock: Class of stock with rights that differ from common stock, such as higher dividends.
• Blue Chip shares: Company with a large market cap, strong reputation, and long history of success.
• shareholder: Legally owns at least one share of stock and has rights related to the company.
• preemptive right: Contractual ability to acquire new property before it's offered to others.
• preemption: Shareholder's right to purchase newly issued shares before the public.
• IPO: Initial public offering, the process of offering shares of a private corporation to the public.
• Capital stock: Serves as security for creditors of a business since it cannot be withdrawn to the detriment of the creditors.
• Ownership of stock represents a stake of ownership in the business entity.
• A stock certificate is a legal document that specifies the number of shares owned by the shareholder.

Stakeholders

• Shareholders are a subset of stakeholders, which includes anyone with a direct or indirect interest in the business entity.
• Stakeholders include labor, suppliers, customers, and the community.

Rights of Stockholders

• The right to sell shares
• The right to vote on directors nominated by the board
• The right to nominate directors and propose shareholder resolutions
• The right to dividends if they are declared
• The right to purchase new shares issued by the company
• The right to what assets remain after a liquidation

Control and preemption

• Control and preemption are particular stockholder rights.
• Preemption right is a contractual right to acquire certain property coming into existence before it can be offered to any other person or entity.
• The incentive to exercise the preemption option is based on the desire to protect individual ownership or stake in a company from dilution.

The risks of investing

• Investing in stocks is a risky game.
• Risks of Investing in the stock market is a necessary part of investing.
• Greater risks do not guarantee greater returns.
• Stock market is risky for the people who are greedy.
• Stock market is risky for the people who don't have patience.
• You can lose 100% of your money in an individual stock.

Preferred vs Common Stock

• Preferred stock usually does not give shareholders voting rights, while common stock does.
• Preferred shareholders have priority over a company's income.
• Common stockholders are last in line when it comes to company assets.

Blue Chip Stocks

• Blue chip stock is a huge company with an excellent reputation.
• Blue chip stock typically has a market capitalization in the billions.
• Investors turn to blue chip stocks because they have dependable financials and often pay dividends.
• It's crucial to diversify a portfolio beyond only blue-chip stocks.

Bonds

• Bonds: Give a set amount of money to a government body or business for a specific period of time at a set interest rate.
• T-bills: Short-term securities with a term of less than one year and only pay interest at the end of the term.
• T-note: Has a term of several years and interest earned gets disbursed every six months.
• Bond: The same as a T-note, but the term is more than 10 years.
• Certificates of Deposit (CDs) are issued by a bank instead of a particular organization.
• CDs can have a term of just a few months or up to 5 years.

Junk Bonds

• Junk bonds are high yield, high risk.
• Junk Bonds are also known as high-yield bonds because the interest payments are higher than for the average corporate bond.
• Companies that issue junk bonds pay these high interest rates to entice investors to take on the higher risk of lending them money.

Key Takeaways

• Bonds are units of corporate debt issued by companies and securitized as tradeable assets.
• A bond is a fixed-income instrument since bonds traditionally paid a fixed interest rate to debtholders.
• Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa
• Bonds have maturity dates at which point the principal amount must be paid back in full or risk default.

Bull and Bear Markets

• A bull market is on the rise and where the economy is sound; while a bear market exists in an economy that is receding, where most stocks are declining in value.
• The majority of investors are typically "bullish."
• A bear market can be more dangerous to invest in, as many equities lose value and prices become volatile.
• It is hard to time a market bottom.

Bull Market vs. Bear Market

• A bull market is typified by a sustained increase in prices and investors have faith that the uptrend will continue over the long term.
• A market is usually not considered a true "bear" market unless it has fallen 20% or more from recent highs.
• Supply and demand for securities
  • In a bull market, there is strong demand and weak supply for securities
  • In a bear market, more people are looking to sell than buy.
• Investor psychology
  • In a bull market, investors willingly participate in the hope of obtaining a profit.
  • During a bear market, market sentiment is negative
• Change in Economic Activity
  • A bear market is associated with a weak economy.
  • In a bull market, the reverse occurs.
• The key determinant of whether the market is bull or bear is not just the market's knee-jerk reaction to a particular event, but how it's performing over the long term.
• Sometimes a market may go through a period of stagnation as it tries to find direction.
• Perfectly timing the market is almost impossible.

What to Do in Each Market

• In a bull market, the ideal thing for an investor to do is to take advantage of rising prices by buying stocks early in the trend and then selling them when they have reached their peak.
• In a bear market, however, the chance of losses is greater because prices are continually losing value and the end is often not in sight.
• Investors may benefit from taking a short position in a bear market and profiting from falling prices.

Cryptocurrencies

• Cryptocurrency is a digital currency verified and recorded by a decentralized system using cryptography.
• Cryptocurrencies are exclusively virtual currencies with no physical form.
• New cryptocurrency units enter circulation through a technological process where volunteers all over the world use their computers via a decentralized process.
• Cryptocurrencies are not controlled or operated by any single entity in any single country.
• Key Differences From Regular Currency
  • Regulation: Cryptocurrency is a largely unregulated market.
  • Speed and cost: Cryptocurrencies are much faster than using the legacy banking system.
  • Supply: Cryptocurrencies usually have a predictable supply determined by an algorithm.
  • Immutable: All completed crypto transactions are permanent and final.

Crypto details

• “crypto” in cryptocurrency refers to the special system of encrypting and decrypting information – known as cryptography – which is used to secure all transactions sent between users.
• Cryptocurrencies cannot be stored outside of the blockchain.
• Cryptocurrencies use cryptography to encrypt sensitive information, including the private keys.
• Wallet addresses indicate the destination of transactions and encryptions are executed in only one direction, which makes it impossible to derive private keys from a person’s wallet addresses.

How it works

• Cryptocurrencies rely on public ledger technology called “blockchain” to record data and to keep track of all of the transactions being sent across the network.
• The nodes collectively manage the database and confirm new entries are valid transactions.
• This infrastructural design makes it possible for cryptocurrencies to evade the security mishaps that often plague fiat.

Validation

• Blockchains are distributed databases where all the transactions executed on a crypto network are recorded permanently.
• Crypto transactions are validated by nodes (computers connected to a blockchain).
• Only way to guarantee there will always be individuals willing to invest their time and computers in a blockchain’s validation system is to introduce incentives to do so.
• Types of Consensus Protocols
  • Proof-of-work (PoW): Requires validators (known as miners) to compete using expensive equipment in order to generate a winning code that grants them the right to add a new block of transactions to the blockchain.
  • Proof-of-stake (PoS): Node operators don’t need to spend a considerable amount on specialized mining equipment.

Tokens

• Tokens are digital assets issued by decentralized applications based on blockchains.
• Because these applications depend on the infrastructure of blockchains, transactions involving tokens come with an added fee settled in the native cryptocurrency of the blockchain in question.
• Cryptocurrencies are digital assets based on blockchains.
• Digital currencies are any form of money in digital form, be it cryptocurrencies or central bank-backed virtual money.
• The cryptocurrencies of blockchains perceived to have a wide range of utilities are usually more valuable than those that don’t offer much.

Mining

• In cryptocurrency networks, mining is a validation of transactions and miners earn a small amount of cryptocurrency if they do so successfully
• Mining has diminished and often does not justify the investment in equipment and cooling facilities.
• Some miners pool resources, sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block.
• ATMS -In 2014 Bitcoin launched ATMs
• U.S. tax status
  • Bitcoin will be treated as property for tax purposes so are subject to capital gains tax.

Non-Fungible Tokens (NFTs)

• An NFT is a digital asset that represents real-world objects like art, music, in-game items, and videos.
• They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
• NFTs are also generally one of a kind with unique identifying codes.
• An NFT allows the buyer to own the original item.
• Cryptocurrency are “fungible,” meaning they can be traded or exchanged for one another.
• NFTs are different and each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another.

How NFTs Work

• NFTs exist on a blockchain, which is a distributed public ledger that records transactions.
• NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.
• An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
  • Grafic art
  • GIFs
  • Videos and sports highlights
  • Collectibles
  • Virtual avatars and video game skins
  • Designer sneakers
  • Music
• NFTs can have only one owner at a time, and their use of blockchain technology makes it easy to verify ownership and transfer tokens between owners.

Purposes

• Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their wares.
• Brands have auctioned off themed NFT art to raise funds for charity.
• Crypto is acquired using a digital wallet
• Crypto can be purchased on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood.l funds pool money from many investors to purchase stocks, bonds, and other securities.
• They offer instant diversification, r