So here's the final part of the question from my reader (see yesterday's blog post):
The money (in a stock) is not really yours and you can’t treat it as a constant because the market can change at any time, so what can you use your invested money for?
Pretty much everything we own can fluctuate in value. Owning stock in Microsoft (and all our investments in general) has certainly done that over time, to be sure. But the shares in the company ARE in fact ours. No, we can't physically touch the shares, they have not been converted to cash, and I don't carry them around with me (no Microsoft earrings, for example). And yes, the market does change on a daily basis, depending what in the World is going on!!
Change is pretty much the nature of the universe, I'd say. But before this gets too deep, let's look at a few basic concepts.
How do I look?
Money in investments-- stocks, bonds, mutual funds and ETFs-- are part of your net worth. Your net worth can be estimated to show how you are doing financially. Stocks, bonds, mutual funds and ETFs are all assets that are part of your net worth.
Assets are what you own outright. Other assets are things such as a home you may own, other real estate properties or rentals that you may own, your 'stuff' in general, like cars, jewelry & furniture, and art & collectibles.
The things I'll wear for treats...
Net worth is calculated by subtracting your liabilities (what you owe other people: money on loans for things like college, cars, home mortgages, & credit cards) from your assets.
Positive net worth means you own more than you owe. Negative net worth means you owe more than you own.
So why do these ideas matter if you are not selling your assets? It matters for the long haul, in that you have a nest egg for some future use of your investment assets. Having money for a rainy day, a big life event like a wedding, furthering your own or your kids' education, or putting down a deposit on a home is a beautiful thing! If you buy a stock and its price goes up, you do not pay taxes on that stock until you sell it.
It also matters because you can use your assets (investments) as collateral for borrowing money.
Collateral is essentially an asset that you can promise to a lender (such as a bank) as a form of insurance for repayment on a loan. Banks lend to people they feel are a safe bet for repayment. The agreement would be that you would give up your collateral to the lender (in this case, we're talking about your stocks) if you don't pay back the loan.
Banks can make what are called security-based loans to people with eligible securities as collateral (those stocks, bonds, mutual funds and ETFs we've talked about). This may be useful for people with solid assets so that they can borrow money without having to sell their stocks, bonds, mutual funds or ETFs.
Circumstances where you may want to borrow money would include buying a car, a home, or borrowing for education.
As long as we don't have to wear these on our walk, it's fine.
Of course you may choose to sell your stock rather than get a loan. But if your stock is doing nicely, you may do better getting a loan if you need one than dipping into your investment portfolio. Your investment returns may be higher than the interest rate you get charged by a bank for your loan. Also, you will pay taxes on any capital gains (the money you make on your investment when you sell) where the interest on many loans is actually tax-deductible.
I hope these 2 articles answer my reader's questions!! As always, the topics I write about lead to more questions about investing. Have a good remainder of the weekend, everyone!