Making Cents of: Investing your money

Putting your hard-earned money into stocks and mutual funds can sound intimidating to any new student investor. However, with the right education, smart investing could help you stay ahead of the game while most college students are in debt.

The first step of investing is to figure out how much money you’re able put into a savings account or investment each month. A common misconception about investing is that you have to have a lot of money to invest. With only $100, you can do a lot in terms of investing your money.

However, when deciding whether or not to invest, make sure that you have the rest of your financial life in order. If you have lots of student loans or credit card debt, investing in stocks and mutual funds is probably not a good idea for the time being.

So, you may ask, what exactly is a stock? When you purchase a stock, you have ownership in that company, no matter how small the investment is. Your money is tied to every dollar the company makes, as well as any financial pitfalls the company may run into.

With many corporate accounting scandals swirling in the news, you might be wary of investing your money in a company’s stock that could belly-up the next day.

However, when the market is down, it just means you can buy more stocks at a better price.

Mutual funds are another investment option if investing at a low risk is important to you. Mutual funds pool the money of many investors and then money managers invest in a number of shares, which make up a portfolio, depending on different criteria such as a particular section like pharmaceuticals.

Even if you decide not to invest in mutual funds, diversification is the key to any investment. Financial advisors will always recommend diversification with any money you decide to invest.

Diversification means that even though you love Starbucks and think your investment in their cafe mochas will keep their stock price high, it’s a safer bet to spread your money out over many different stocks.

If you decide to choose your own stocks, it’s important to understand the “valuation” of a stock, which helps you determine how the stock is being valued in the market. The P/E ratio, which divides the current price per share of the stock by the earnings per share, is way to calculate valuation. A lower P/E ratio means the price of the stock more closely tied to the company’s earnings.

For example, Starbucks’ current price per share as of Sunday afternoon was $35.92 and their earnings per share was $0.65. So the P/E ratio for Starbucks is 55.26. In comparison, Apple Computer’s current price per share was $71.46 and their earnings per share was $1.85, with a P/E ratio of 38.54.

Even though Apple’s stock is about twice the cost of Starbucks’ stock, it would be cheaper to purchase Apple’s stock because of the company’s lower P/E ratio.

If investing in stocks or mutual funds still sounds too risky to you, online savings accounts are also an option. These accounts offer higher interest rates than traiditonal banks. HBSCdirect.com offers 4.80 percent APT on new desposits.

It’s also important to realize that you might not succeed with investing right away.

Look at investing as a long-term project that may take five or so years before you can really see the benefits.

Sara Bahnson
Business & Tech Columnist

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