A friend of mine lent me the book Rich Dad's Conspiracy of the Rich by Robert Kiyosaki. Kiyosaki is a very polarizing figure in the world of personal finance and wealth building, and I've read one of his other books before, so I thought this would be an interesting read. As a side note, I think Kiyosaki is crazy like a fox. His advice is very good, but at the same time carries a lot of risk that he doesn't adequately account for in the book that I first read.
He starts the book by lamenting about the poor state of financial education in public schools and lists a bunch of basic finance terms that people may not fully understand, so I thought I would go over them for starters. These questions and terms are taken from page 6.
The difference between a stock and a bond: Stocks represent an ownership stake in a company. Bonds represent debt obligations of a company or city. A bond is promise to pay back money that has been borrowed by the company/city, whereas a stock promises nothing unless you acquire enough stock to get control of the company.
Why are preferred stocks labeled preferred? Preferred stock(or shares) are like a cross between a stock and bond. Preferred stock typically pays a set dividend, generating income like a bond, but also can trade like a regular stock share.
Why are mutual funds labelled mutual? They are mutual because a group of people pools their money to buy more stocks at lower cost than an individual could on their own. To get a diverse mix of stocks requires a lot of money and substantial costs, which mutual funds spread among all investors to lessen the impact on the individual.
The difference between a mutual fund, a hedge fund, and exchange traded fund (ETF) and a fund of funds. A mutual fund is explained above. A hedge fund is similar to a mutual fund, but it is a private investment and can therefore take more risks(and thereby get greater returns). Because it is riskier, hedgefunds typically require investors to be very wealthy already so a significant loss will not be as bad for the investors. An exchange traded fund is a mutual fund that trades during the day like a regular stock. ETF's are usually cheaper to own than a similar mutual fund, but have more transaction cost. A fund of funds is made up of many mutual funds to give the investor one place to meet all their diversification needs. The most common examples are "lifetime" funds or "Target retirement" funds that change their assets overtime as people get to a specific retirement date.
How debt can be both "good" and "bad". Bad debt is debt that brings no return on your investment. All your unpaid credit card balances typically fall into this category, as well as car loans and personal loans. When you go to sell or trade in your car, it will be worth far less than what you paid for it if you bought it new. Good debt helps you increase you finacial returns. Houses are the most common example, or buying stock on margin (a loan from your broker). You could also borrow to start a business. By borrowing money you can afford something you wouldn't have been able to buy on your own, and which could be sold for a profit( or produce income). In my experiance Kiyosaki tends to downplay the risks involved with "good" debt.
The difference between capital gains and cashflow. Capital gains are the differnce in price between what you paid for something and what you sell it for. For example, a stock day trader hopes to make money by buying a stock a low price and selling at a higher price. Loosely speaking, cashflow is money that you earn from your investments or business. For example, if the stocks you own pay a dividends, you get a steady stream of income as long as you own them.
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