14yo very very new to investing.

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tokersah
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14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 11:42 am

I just started reading about investing and I want to make sure I understand something here.
So if bonds, CDs, bills etc they guarantee they will pay you a fixed interest rate in return for using your money, but the value of that loan (i.e. investment) changes when interest rates rise or fall then why does it say that its a fixed interest rate if interest rates can rise or fall? so do you really know what you're getting in return or is a is a fixed interest rate a type of loan>? I'm very confused.

tokersah
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What is a fixed interest rate?

Post by tokersah » Tue Jun 05, 2018 2:04 pm

New to investing and I have a quick question, what is a fixed interest rate?

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Re: 14yo very very new to investing.

Post by LadyGeek » Tue Jun 05, 2018 3:21 pm

tokersah, Welcome! It's best to keep all the information in one spot. I merged your questions together.

Please continue to ask questions here. If you don't understand an answer, let us know and we'll try again.

You might be interested in this free download: If You Can: How Millennials Can Get Rich Slowly
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Re: 14yo very very new to investing.

Post by CnC » Tue Jun 05, 2018 3:31 pm

I'll answer your first question if you buy a CD or a bond outright you will get paid the interest agreed upon when you buy it.


If you were to invest in an index fund your rate will vary with time and as rates go up or go down you can expect your yield to do basically the same.


I think your loan question doesn't really apply. A loan really has very little to do with CD's.

I have a little time if you ask any specific questions I will be happy to give you straight forward specific answers.

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Re: 14yo very very new to investing.

Post by nimo956 » Tue Jun 05, 2018 3:35 pm

In general, the interest rate on a particular bond or CD is fixed, so the amount you receive from the issuer will not change. However, bonds are traded on an open market so the value of your particular bond relative to the price of other bonds can change, depending upon interest rates.

If you could invest in two bonds: one with 3% interest and another with 5% interest, then you aren't going to pay as much for the 3% bond. The price you pay will be discounted to make up for the fact that it pays less interest than other bonds available to be purchased.
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Re: 14yo very very new to investing.

Post by sport » Tue Jun 05, 2018 3:54 pm

CnC wrote:
Tue Jun 05, 2018 3:31 pm
A loan really has very little to do with CD's.
Actually, a CD is a loan. When you buy a CD, you are lending the money to a bank. The bank promises to pay a stated interest rate and return the money to you at maturity. A main feature of this loan is that is FDIC insured.

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Re: 14yo very very new to investing.

Post by oldzey » Tue Jun 05, 2018 4:01 pm

Hi tokersah - welcome to the forum!

Here's a great set of videos from one of our forum members (Rick Van Ness) that you may find useful: https://www.youtube.com/user/FinancingLife101/videos

Also, be sure to check out the Wiki: https://www.bogleheads.org/wiki/Getting_started
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Re: 14yo very very new to investing.

Post by livesoft » Tue Jun 05, 2018 4:04 pm

Let me ask you a question: Do you know what a savings account is? How does it work?
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Re: 14yo very very new to investing.

Post by mcraepat9 » Tue Jun 05, 2018 4:10 pm

tokersah wrote:
Tue Jun 05, 2018 11:42 am
I just started reading about investing and I want to make sure I understand something here.
So if bonds, CDs, bills etc they guarantee they will pay you a fixed interest rate in return for using your money, but the value of that loan (i.e. investment) changes when interest rates rise or fall then why does it say that its a fixed interest rate if interest rates can rise or fall? so do you really know what you're getting in return or is a is a fixed interest rate a type of loan>? I'm very confused.
The value of the bond itself may go up or down (i.e. if you own a 2% bond of a corporation and interest rates generally are going up such that if you bought a new bond today issued by that corporation the interest rate would be more like 4%, then nobody is going to buy your bond for very much - a buyer would insist on buying it from you at a discount to make up for the fact that they could buy a brand new bond with 4% rate). However, the bond itself is still a 2% bond issued by X corporation. The 2% interest rate is payable on the face amount of the bond outstanding, not the value of the bond itself (i.e. what the bondholder could sell the bond at to a third party). It is still a fixed rate instrument.
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Re: 14yo very very new to investing.

Post by LadyGeek » Tue Jun 05, 2018 4:15 pm

tokersah - Let me ask a very basic question: Are you asking for yourself or for someone else?

If you are asking for yourself, can you lay out how you got this money and what you want to do with it? Since you're 14, your parents can help you put the money away - we can show you how to do it.

CDs and savings accounts are a great way to start. Stocks and bonds can come later - like when you finish high school or college.

Otherwise, you'll get buried on all of the answers here and end up no better off. Instead of asking questions on "theory", just tell us what you want to do and we'll guide you through it.

As for bonds... it took me a year (really) to understand how bond prices vs. interest rate worked. (The gory details are in this wiki article: Bond pricing - don't worry about understanding it.)
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Re: 14yo very very new to investing.

Post by StevieG72 » Tue Jun 05, 2018 4:16 pm

Welcome to the forum.

It is impressive that you are interested in investing at your age, it will pay off. Not only that, you found the absolute best free resource available to investors which is this website.

Fixed interest is a fixed rate for the term of the product, it does not fluctuate.

Check out the Wiki link for a wealth of information and some recommended books.
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Re: 14yo very very new to investing.

Post by Doctor Rhythm » Tue Jun 05, 2018 4:26 pm

Welcome!

This is a great question (one which I didn't even know to ask until I was much older than you). I think it helps to think of the interest rate, the amount invested and the market value of the bond as separate (but related) things. The fixed interest rate offered by the bond issuer is exactly that: a promise to pay a fixed rate. No matter what happens to the economy (growth or recession), the bond's interest rate is fixed. And when the bond matures (time to pay back the loan), the issuer also agrees to pay back amount you invested. That's the contract between just you and the bond issuer. On the other hand, the market value of the bond can change for any number of reasons because it is simply what other people are willing to pay for it

As an example, you bought a $100 bond that gives you 2% interest per year for ten years. You get $2 each year and after 10 years, you get your $100 back as well. Thus, you've earned $20. However, let's say you want to sell your $100 10-year bond after just two years. If similar newly issued bonds are only paying 1% interest at that time, I would be willing to pay you $105 for your $100 bond because I'll still come out ahead plus I get my money back sooner compared to buying a newly issued bond. So in this example, the interest rate (2%) and the invested/loaned amount ($100 - also called the par value) didn't change. However, the market price of the bond increased from $100 to $105.

Hope this helps.
Last edited by Doctor Rhythm on Tue Jun 05, 2018 5:00 pm, edited 1 time in total.

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Re: 14yo very very new to investing.

Post by alex_686 » Tue Jun 05, 2018 4:48 pm

tokersah wrote:
Tue Jun 05, 2018 11:42 am
So if bonds, CDs, bills etc they guarantee they will pay you a fixed interest rate in return for using your money, but the value of that loan (i.e. investment) changes when interest rates rise or fall then why does it say that its a fixed interest rate if interest rates can rise or fall? so do you really know what you're getting in return or is a is a fixed interest rate a type of loan>? I'm very confused.
I am assuming that this is a "Investment Theory" question, not a "Personal Investment" question. The answer lies in "Time Value of Money" or "Net Present Value" (NPV) calculations. You can find NPV calculators on line and in most spreadsheets.

Let us say that you have a $100 bond that matures in 10 years that has a rate of 3%. The day after you buy the bond the market moves and now 10 year bonds have a rate of 5%. The "No Arbitrage Pricing Principle" says the 2 loans have to have the same return. After all, how could you sell your 3% bond if I can go into the market and get 5%? The answer is that you drop your price of your bond to about $85. Over the course of 10 years that $15 discount you have to offer will make your bond's yield equivalent to a 5% yielding bond.

Notes: A CD is just a special type of bond. Also one person's bond is another person's loan. We could get into a long and complex discussion if you would break even if you held the bond for 10 years. Investment theory and accounting standards say you take the hit today. Consider the case where inflation jumps from 2% to 4%. Yeah, you have more money at the end of 10 years but that money has less value.

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Re: 14yo very very new to investing.

Post by Pajamas » Tue Jun 05, 2018 4:52 pm

tokersah wrote:
Tue Jun 05, 2018 11:42 am
I just started reading about investing and I want to make sure I understand something here.
So if bonds, CDs, bills etc they guarantee they will pay you a fixed interest rate in return for using your money, but the value of that loan (i.e. investment) changes when interest rates rise or fall then why does it say that its a fixed interest rate if interest rates can rise or fall? so do you really know what you're getting in return or is a is a fixed interest rate a type of loan>? I'm very confused.
I think the confusion is about the particular interest rate on a specific bond, CD, or bill, which is usually fixed vs. general interest rates, which fluctuate.

It is the relationship between the particular fixed interest rate and the fluctuating general interest rates which can cause the price of a bond, CD, or bill to change, up or down. However, if you hold the bond, CD, or bill to maturity, you get the face value back in addition to the interest.

There are some bonds, CDs, and bills with variable or floating interest rates but most have a fixed interest rate.

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Re: 14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 4:55 pm

Thank you all for the replies just give me a couple minutes to read everything as I'm getting pretty overwhelmed
Last edited by tokersah on Tue Jun 05, 2018 6:01 pm, edited 1 time in total.

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Re: 14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 5:03 pm

LadyGeek wrote:
Tue Jun 05, 2018 4:15 pm
tokersah - Let me ask a very basic question: Are you asking for yourself or for someone else?

If you are asking for yourself, can you lay out how you got this money and what you want to do with it? Since you're 14, your parents can help you put the money away - we can show you how to do it.

CDs and savings accounts are a great way to start. Stocks and bonds can come later - like when you finish high school or college.

Otherwise, you'll get buried on all of the answers here and end up no better off. Instead of asking questions on "theory", just tell us what you want to do and we'll guide you through it.

As for bonds... it took me a year (really) to understand how bond prices vs. interest rate worked. (The gory details are in this wiki article: Bond pricing - don't worry about understanding it.)
I just wanted to learn about investing and money. Sorry that I put the post in "Helping with Personal Investments" But what I am trying to ask is that if I purchase a bond that has a fixed interest rate how can the interest rate change or is that the interest rate in the market or something?
Last edited by tokersah on Tue Jun 05, 2018 5:24 pm, edited 3 times in total.

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Re: 14yo very very new to investing.

Post by 22twain » Tue Jun 05, 2018 5:11 pm

nimo956 wrote:
Tue Jun 05, 2018 3:35 pm
If you could invest in two bonds: one with 3% interest and another with 5% interest, then you aren't going to pay as much for the 3% bond. The price you pay will be discounted to make up for the fact that it pays less interest than other bonds available to be purchased.
When you buy the bond also matters. If you buy either of the bonds above close to their maturity date, neither of them will pay very much interest before they mature, but you will receive their face value when they do mature.

So in general, if interest rates rise for new bonds, the value of an old bond (with a lower interest rate) decreases; then as that old bond approaches its maturity date, its value increases until it finally equals the face value.
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Re: 14yo very very new to investing.

Post by LadyGeek » Tue Jun 05, 2018 6:41 pm

tokersah wrote:
Tue Jun 05, 2018 5:03 pm
I just wanted to learn about investing and money. Sorry that I put the post in "Helping with Personal Investments" But what I am trying to ask is that if I purchase a bond that has a fixed interest rate how can the interest rate change or is that the interest rate in the market or something?
No problem, we can discuss it here.

Answer: Bonds have two moving parts - what you paid for it (the "principal" at maturity), and the on-going interest rate (the "coupon" rate, what it pays every month). They are both affected by the market, which in-turn changes the price of the bond and the amount of interest it will pay.

If you hold a 20 year bond for 20 years, you will get back what you paid for it - plus - all the interest it's paid to you for 20 years. So far, so good.

However... Suppose you don't want to hold that bond for 20 years? How much is someone willing to pay you for it and take it off your hands? Conversely, you wanted to buy a bond. How much are you willing to pay for it (interest rate or principal)? That's why you are seeing all this theory about what happens to bonds. The supply and demand for them works in such a way that interest rates rise and the principal drops.

Here's a little bit of theory, but that's the simplest one I could find: Bond Basics: Yield, Price And Other Confusion Just skim over it and don't worry about the details.

Did that answer your question? What else can we help you with?
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Re: 14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 7:54 pm

Thank you. I'm just trying right now to learn the fundamentals of investing and how everything works but can be very confusing sometimes.
At first, I had a question about money market funds which I then got my answer from financinglife101 on youtube which then led me to another question; this question. He also told me about this site too!

tokersah
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Re: 14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 8:23 pm

LadyGeek wrote:
Tue Jun 05, 2018 6:41 pm
tokersah wrote:
Tue Jun 05, 2018 5:03 pm
I just wanted to learn about investing and money. Sorry that I put the post in "Helping with Personal Investments" But what I am trying to ask is that if I purchase a bond that has a fixed interest rate how can the interest rate change or is that the interest rate in the market or something?
No problem, we can discuss it here.

Answer: Bonds have two moving parts - what you paid for it (the "principal" at maturity), and the on-going interest rate (the "coupon" rate, what it pays every month). They are both affected by the market, which in-turn changes the price of the bond and the amount of interest it will pay.

If you hold a 20 year bond for 20 years, you will get back what you paid for it - plus - all the interest it's paid to you for 20 years. So far, so good.

However... Suppose you don't want to hold that bond for 20 years? How much is someone willing to pay you for it and take it off your hands? Conversely, you wanted to buy a bond. How much are you willing to pay for it (interest rate or principal)? That's why you are seeing all this theory about what happens to bonds. The supply and demand for them works in such a way that interest rates rise and the principal drops.

Here's a little bit of theory, but that's the simplest one I could find: Bond Basics: Yield, Price And Other Confusion Just skim over it and don't worry about the details.

Did that answer your question? What else can we help you with?
Ok, so the value of the investment can change when the interest rate in the market rises or falls?

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Re: 14yo very very new to investing.

Post by LadyGeek » Tue Jun 05, 2018 8:47 pm

The short answer is Yes.

You can also be confused on what a "market" is. In the news, you'll hear about the New York Stock Exchange and something called a "Dow Jones Industrial Index" and the "Standard & Poor (S&P) 500". Those are ways to measure the stock market.

Stock is a share of ownership in a company. A stock's value depends on what people think the company will do. It goes higher if they think it will do better, lower if it doesn't. There are many thousands of stocks that get traded every day.

Those market measurements only pick a few of them to represent the entire market's performance. Consider that as being mostly accurate.

The key point is that if you buy a stock and it goes up in value when you sell it, you make money. If it goes down in value, you lose money. How do you know when to sell it? You don't. You're not alone, as the experts don't know either. A LOT of money is spent in advertising to try and get you to buy stocks and bonds and you need to be careful.

The best way to be sure of what you're getting is to put the money into a savings account or CD. People don't like doing that because the rates are much lower than what you can get with a stock or bond. However... there's a huge risk a stock or bond can lose money. There's no right answer and is why we have this forum and all kinds of information available to help readers make the decision that's right for them.
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Re: 14yo very very new to investing.

Post by alex_686 » Tue Jun 05, 2018 8:55 pm

tokersah wrote:
Tue Jun 05, 2018 8:23 pm
Ok, so the value of the investment can change when the interest rate in the market rises or falls?
Yes. The concept is called "Duration Risk". Google "Bond Duration" for many good articles.

That being said, duration risk is a intermediate concept with a fair amount of math behind it. How far down this rabbit hole do you want to go? As a theorical concept it is very important. For practical advice just know that risk and return are linked, and if you are getting a higher return there is probably some extra risk. For anything that has a maturity of under 3 years thhe risk is pretty small.

As a new investor I would suggest that your first step is to figure out your goals. Long term or short term? Can you afford to take risks and is the goal flexible? Or is the goal fixed and thus your ability to take risks low?

I would suspect at this point you want a low risk flexiable type of account. At this age you will have unexpected opportunists pop up. Take advantage of them.

This would argue against locking up your money in CDs. On the flip side, CDs do lock you in to a schedule and some people find that reinforces their displine.

At Bogleheads we tend to favor mutual funds. However most of these require $1000 to $3000 for a initial investment. Education accounts - which includes IRAs - often have lower limits - say $500.

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Re: 14yo very very new to investing.

Post by arcticpineapplecorp. » Tue Jun 05, 2018 9:05 pm

tokersah wrote:
Tue Jun 05, 2018 7:54 pm
Thank you. I'm just trying right now to learn the fundamentals of investing and how everything works but can be very confusing sometimes.
At first, I had a question about money market funds which I then got my answer from financinglife101 on youtube which then led me to another question; this question. He also told me about this site too!
welcome to the forum. The administrator of financinglife101 is Rick Van Ness and he's one of the good guys. He also put up 10 short videos on bogleheads that I recommend you watch because they're pretty good explanations about investing:

https://www.bogleheads.org/wiki/Video:B ... philosophy
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: 14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 9:16 pm

alex_686 wrote:
Tue Jun 05, 2018 8:55 pm
tokersah wrote:
Tue Jun 05, 2018 8:23 pm
Ok, so the value of the investment can change when the interest rate in the market rises or falls?
Yes. The concept is called "Duration Risk". Google "Bond Duration" for many good articles.

That being said, duration risk is a intermediate concept with a fair amount of math behind it. How far down this rabbit hole do you want to go? As a theorical concept it is very important. For practical advice just know that risk and return are linked, and if you are getting a higher return there is probably some extra risk. For anything that has a maturity of under 3 years thhe risk is pretty small.

As a new investor I would suggest that your first step is to figure out your goals. Long term or short term? Can you afford to take risks and is the goal flexible? Or is the goal fixed and thus your ability to take risks low?

I would suspect at this point you want a low risk flexiable type of account. At this age you will have unexpected opportunists pop up. Take advantage of them.

This would argue against locking up your money in CDs. On the flip side, CDs do lock you in to a schedule and some people find that reinforces their displine.

At Bogleheads we tend to favor mutual funds. However most of these require $1000 to $3000 for a initial investment. Education accounts - which includes IRAs - often have lower limits - say $500.
Thank you. I just googled it.

tokersah
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Re: 14yo very very new to investing.

Post by tokersah » Tue Jun 05, 2018 9:17 pm

LadyGeek wrote:
Tue Jun 05, 2018 8:47 pm
The short answer is Yes.

You can also be confused on what a "market" is. In the news, you'll hear about the New York Stock Exchange and something called a "Dow Jones Industrial Index" and the "Standard & Poor (S&P) 500". Those are ways to measure the stock market.

Stock is a share of ownership in a company. A stock's value depends on what people think the company will do. It goes higher if they think it will do better, lower if it doesn't. There are many thousands of stocks that get traded every day.

Those market measurements only pick a few of them to represent the entire market's performance. Consider that as being mostly accurate.

The key point is that if you buy a stock and it goes up in value when you sell it, you make money. If it goes down in value, you lose money. How do you know when to sell it? You don't. You're not alone, as the experts don't know either. A LOT of money is spent in advertising to try and get you to buy stocks and bonds and you need to be careful.

The best way to be sure of what you're getting is to put the money into a savings account or CD. People don't like doing that because the rates are much lower than what you can get with a stock or bond. However... there's a huge risk a stock or bond can lose money. There's no right answer and is why we have this forum and all kinds of information available to help readers make the decision that's right for them.
Thank you, I will keep all of this information from this thread in mind.

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