Personal Finance For Dummies

You’re an owner when you invest your money in an asset, such as a company or real estate, that has the ability to generate earnings or profits. Suppose that you own 100 shares of Verizon Communications stock. With billions of shares of stock outstanding, Verizon is a mighty big company — your 100 shares represent a tiny piece of it. What do you get for your small slice of Verizon? As a stockholder, although you don’t get free calling, you do share in the profits of the company in the form of annual dividends and an increase (you hope) in the stock price if the company grows and becomes more profitable. Of course, you receive these benefits if things are going well. If Verizon’s business declines, your stock may be worth less (or even worthless!).

Real estate is another one of my favorite financially rewarding and time-honored ownership investments. Real estate can produce profits when it’s rented out for more than the expense of owning the property or sold at a price higher than what you paid for it. I know numerous successful real-estate investors (myself included) who have earned excellent long-term profits.

The value of real estate depends not only on the particulars of the individual property but also on the health and performance of the local economy. When companies in the community are growing and more jobs are being produced at higher wages, real estate often does well. When local employers are laying people off and excess housing is sitting vacant because of previous overbuilding, rent and property values fall, as they did in the late 2000s.

You’re a lender when you invest your money in a bank certificate of deposit (CD), a treasury bill, or a bond issued by a company like Exxon Mobil, for example. In each case, you lend your money to an organization — a bank, the federal government, or Exxon Mobil. You’re paid an agreed-upon rate of interest for lending your money. The organization also promises to have your original investment (the principal) returned to you on a specific date.

may want to consider investing in growth investments, such as stocks, within a retirement account that you leave alone for 20 years or longer.