2️⃣ How does money actually grow? — Learning about deposits, bonds, and stocks from scratch
Last time, I learned that schools today teach a surprisingly wide range of topics about “money.” Now, starting with this installment, I am beginning my own serious study. My first question is very simple: How does money actually grow in the first place? I also invest in stocks. I put a big chunk of my retirement money into them, and currently, I am deep in the red. 😭 On the other hand, my defined contribution pension has grown quite a bit. Furthermore, if I leave money in a bank, it earns interest, however small. Even though it is all called “growing money,” what is the difference? As I looked into it, a major distinction began to emerge. 🔳 First and most obviously, there is “growing money by working.” Before talking about investments, there was something I must not forget: working. Receiving a salary from a company. Making a profit from a business. Doing a side job. Earning income using your own knowledge or skills. When you think about it, this is the most familiar way for us to increase our money. However, it basically requires you to work yourself. So, is there a way for money to beget money without you having to work? This is where we enter the world of finance. 🔳 Depositing in a bank — “Deposits.” First, let’s look at what is probably the most familiar method: deposits. When you deposit money in a bank, you earn interest. But if a child asked me, “Why do they give you money just for leaving it at the bank?” I would be stumped for a moment. 😅 Banks use the money they receive for things like loans to companies and individuals. Companies borrow money from banks for capital investment. We borrow money through home loans. And the borrowers pay interest to the bank. Of course, bank operations are more complex, but if you think of it as a large mechanism, there is a flow: Depositor → Bank → Person or company in need of money. That is why deposits earn interest. 🔳 Lending to the government or companies — “Bonds.” So, what is the mechanism for the government or companies to borrow money without going through a bank? That is where bonds come in. For example, things issued by the government are government bonds. Things issued by companies are corporate bonds. To put it very simply, it is a world of “I will lend you money. In return, I will receive interest.” And when the set deadline arrives, in principle, the face value of the money is returned. I see. Deposits and bonds have different mechanisms, but they are similar in that you “lend money and receive compensation for it.” Of course, bonds also have risks, such as price fluctuations and the risk that the issuer will be unable to repay. It does not mean that “bonds are absolutely safe.” 🔳 Owning a part of a company — “Stocks.” And this is where I am currently deep in the red. 😭 Stocks. When you think about the difference from bonds, it is surprisingly easy to understand. Bonds are things where you “lend money” to a company or similar entity. Stocks are things where you “own” a part of a company. If you buy shares, you become a shareholder. If the company grows and more people want to “own” that company, the stock price may rise. If you can sell it for more than you bought it for, you make a profit. Furthermore, depending on the company, some of the profits are returned to shareholders as dividends. However—if the company’s performance worsens or expectations for the future decline, the stock price will fall. Like me, if the current stock price is lower than the price you bought it at, you are in the red. 😂 This is a big difference from deposits. 🔳 There is one more thing: “Owning physical assets.” The ways to increase money are not limited to financial products. For example, buying land or buildings to earn rent, or buying gold and selling it when the price goes up. There is also a way to hold physical assets like real estate or gold. This leads to the idea of diversifying the risk of your entire portfolio by holding assets that move differently from stocks. I would like to study this area again in a later installment. 🔳 In the end, what is the difference in how money grows? Having studied this far, I have simplified it greatly for myself: Working → Earning salary/compensation. Depositing → Earning interest. Lending → Earning interest, etc. Owning a company → Expecting price increases and dividends. Owning physical assets → Expecting rental income or price increases. Organizing it this way has really cleared up my head. I feel like I have been putting “deposits,” “bonds,” “stocks,” “investment trusts,” “NISA,” and “iDeCo” all on the same shelf until now. But apparently, they are different. It seems better to think of the mechanisms by which money grows and the systems or products that use them separately. 🔳 There is a reason why it “grows a lot.” Here, I have also realized something very important. With bank deposits, you cannot expect significant growth, but on the other hand, you basically do not need to worry about price fluctuations every day. On the other hand, with stocks, there is a possibility of significant growth. But there is also a possibility of significant loss. In other words, you should not look only at the “possibility of growing a lot.” On the flip side, there is the question of “how much is the possibility of losing?” This leads to the word “risk,” which is often heard in investing. It seems that I, who put a big chunk of my retirement money into stocks, looked at the “growing side” first. 😅 🔳 Summary — Starting by knowing the “reason for growth.” This time, I went back to the basics and thought about how to increase money. As a result, I saw the differences: 1. Growing by working, 2. Growing by depositing, 3. Growing by lending, 4. Growing by participating in company growth, 5. Growing by holding assets like real estate or gold. The most important thing I thought here was to know “why it grows” before asking “what percentage does it grow?” High returns have their reasons. And in many cases, there is risk behind them. Instead of “buying because it looks like it will grow,” I will choose after understanding the mechanism of how it grows and when it decreases. Even just this is a step forward from the old me. 😂 🔳 Keywords for this time: [Interest] Money received for lending or depositing money. Money received from deposits is also generally called “interest.” [Interest Rate] The percentage indicating how much interest is generated relative to the original money. Expressed as “1% per year,” etc. [Principal] The original money that was deposited or invested. [Bonds] Things issued by the government or companies to borrow funds. If the government issues them, they are government bonds; if a company does, they are corporate bonds. [Stocks] Things issued by companies to raise funds. If you hold stocks, you become a shareholder of that company. [Dividends] A portion of the profits earned by a company returned to shareholders. It is not guaranteed that you will always receive them. [Capital Gains] Profit obtained by selling at a higher price than when you bought it. Also called “capital gains.” [Risk] In the world of investing, it is not just used to mean “danger,” but also to mean how much the return fluctuates. 🔳 Planned series: “A Beginner’s Guide to Money, Learned with Someone Who Lost Money in Stocks” 1. How much do children today learn about “money”? 2. How does money actually grow in the first place? ← This time 3. What are bonds? — What does it mean to lend money to the government or companies? 4. What are stocks? — What does it mean to buy a part of a company? 5. Why am I losing money in stocks? — Thinking about the difficulty of individual stocks 6. What are investment trusts? — What changes with a “bundle”? 7. What is the S&P 500 anyway? — Is it a stock? Is it an investment trust? 8. What is All Country (Orkan)? — What does it mean to invest all over the world? 9. What is the difference between S&P 500 and All Country? 10. What is NISA? — Actually, it is not an “investment product” 11. What is iDeCo? — How is it different from NISA? 12. Defined contribution pensions are growing! — Is this interest? 13. Is personal pension insurance an investment? — Differences between insurance, savings, and investment 14. If investing is scary, is it okay to start with point-based investing? 15. What is good about accumulation? — The meaning of continuing small amounts for a long time 16. When people say “diversify,” what are you diversifying? 17. Deposits, bonds, stocks — How should you use them in the end? 18. Should you change your investment method depending on your age? 19. How do you build money for old age? — Organizing NISA, iDeCo, and pension insurance 20. What I would do now after studying for 20 episodes, as someone who lost money in stocks. *The content and order of the series may change as I learn. #MoneyStudy #InvestmentBeginner #FinancialEducation #AssetFormation #StockInvestment #Bonds #Deposits #InvestmentTrusts #NISA #AdultRelearning