Season 1, Episode 5: Like, literally, what is a stock?

Breaking down the most basic investing terms so we can fit in with other grown ups

We're circling back to the basics: stocks, bonds, index funds and tuxedos. Watch out for a lot of grocery shopping metaphors because it turns out the stock market is an *actual* market with shares on the shelves instead of cereal boxes.

We talk about the secret to not having to learn anything about individual stocks but still invest and how Monopoly isn't the *worst* way to learn a thing or two about bonds.

Oh! And Sara explains the moneyed depths of the ultra secret bond market (who knew??).

This week the one thing Women on the Verge of a Financial Breakthrough can do TODAY to take the first, or next, step towards building a strong financial future involves looking in your money mirror and taking notes on what you see.

Ask us your dumb investing and finance question on our contact page!

This episode was edited by Jes Rowe. Music by Bad Bad Hats and Devmo.

Transcripts for Episode 5: Like, literally, what is a stock?

Music intro by Bad Bad Hats

Caitlin Welcome to women on the verge of a financial breakthrough. The podcast where we're going to figure out finance one dumb question at a time. I'm Caitlin Meredith. I'm a mediator and a coach based in the Bay Area, and I'm Sara Glakas.

Sara I'm an investor, advisor and founder of Black Barn Financial and the Austin Women's Investing Group, which can be found on Meetup.

Caitlin So when I first met Sara, everything I knew about stocks and bonds came from playing Monopoly. As a kid turned out, that wasn't the best foundation for planning my financial future as an adult woman. So I took her investing for beginners class kind of by mistake. And now it's turned into this podcast years later, so I can re learn everything she taught in that class and make it sound like a public service instead of just a private tutorial. Welcome to me, figuring out stocks and bonds and everything else with Sara the expert.

Music transition by Bad Bad Hats

Caitlin So last episode we talked about who the fuck Warren Buffett was, and we used a lot of really fancy terms that I think we need to unpack now so people can use them and buy fancy. I mean, extremely basic, except for someone like me who has to hear it a million times before I can understand it. So here we go.

Caitlin Sara What is this stock?

Sara Is that your first question?

Caitlin Yeah, that's the first one. Are you still dumbfounded that I still don't know this stock?

Sara No, I'm not at all. It's so hard to think of what is a stock, right? So a stock is a little piece of ownership in a company. So usually when we're talking about this, it's stock in a publicly traded company. So something that we can buy and sell on the stock exchange during the trading day, a publicly traded company like Apple or like Microsoft or Facebook. And so the stock is just a tiny, tiny little percentage ownership. You know, maybe there are a million shares of stock in a company. And if you own one, you are a one one millionth owner of that company.

Caitlin Is a share the same as a stock?

Sara We say a share of stock

Caitlin share of stock. So it's not a one to one ratio. One share is not one stock. You say you have a share of stock, the stock is the pie and the share is a piece of the pie.

Sara When we say stock, we usually mean the idea of ownership in the company. So you might say, I own stocks. OK, so that is a specific type of asset thing that you own is ownership in a company. You can also own real estate. You can also own bonds or gold or bitcoin. So when we say I own stocks, it's I own these pieces of paper that are ownership in a company. If you want to be more specific, you would say I own shares in Microsoft stock. I own 250 shares of Microsoft stock.

Caitlin You're buying shares, you're not buying stocks like the category is stocks. I'm at that market. The stock market, I just put that together. You're in the stock market and you are buying shares that are on the counter, the shelves in the stock market?

Sara Yes. OK, the market, like the supermarket, the stock market, the stock market is where you go to buy and sell shares of stock in companies.

Caitlin So one of the things that we talked about was how I feel nervous about just buying the things that I see in my life because it seems like an insignificant fraction of all the companies that are out there that are making money, and that might be a good investment. So you mentioned that the way to avoid being hemmed in by just your small personal knowledge is an index fund. Right? Is that what you said or an exchange traded fund? So what how does that help me? Yes.

Sara So the way that fund usually means, I think of it like a basket of something

Caitlin still at the market.

Sara The fund owns stocks or the fund owns bonds, or the fund owns a mix of stocks and bonds. And so instead of buying just one stock, you buy a piece of a basket of stocks. So that's generally what a fund is. There are mutual funds and there are exchange traded funds. It is not interesting to talk about the difference, but the idea of the basket is important.

Caitlin OK, the basket, but mutual fund, I feel like we hear all the time. Why is it called a mutual fund? What's mutual about

Sara it? You're owning it along with a bunch of other people? And I don't I don't actually know where the term mutual fund like, found its origin.

Caitlin It means something you're you're all going in on together.

Sara Someone is putting it together for you and offering it to you. I don't actually know if that's the origin story of the term mutual fund. OK, now we're going real deep.

Caitlin So you're telling me the meaning of a mutual fund or an index fund? Is this basket? And it has like a box of cereal and it has a part from the car? I wouldn't even know existed. It has just all these different things in it. And when I say I'll put $10 in, I'm getting a portion of that basket and other people are buying from in that basket and we each get like a corner of the cereal box that sixteenth of the iPhone or whatever. We're all sharing what's in that basket equally?

Sara Yes, you're sharing what's in the basket based on the number of shares of the basket you own. I would just kind of in my mind if someone says mutual fund or exchange traded fund, if I'm a beginner, I would just kind of gloss over the new. Will part or the exchange traded part like those are descriptors to describe the word funds. But the concept of the fund is by far the most important part of those phrases.

Caitlin OK. And it's not as vulnerable because if one of those companies went out of business just, you know, totally tanked during the pandemic just tanked. If I had had all my money in the shares of that company stock, I would be very sad. Yeah. Sara is raising her hand in triumph that I use that correctly. Whereas if I had my money invested in index fund, which I actually do, then I could absorb that tanking because there's a bunch of other companies in there, too. And I know that something that you talk about for definitely for beginning investors and for people who have a fixed amount of money to invest, which is, you know, most of us that doing index funds rather than investing in it, like Warren Buffett's advice goes to people who want to do individual stocks because either they have extra money and so they won't be totally screwed if they lose all their money that they have in the stock market. Or, you know, this is their world, this is their full time job. But for and most of us, we might investigate a fund, but not a specific company and worry about their whatever their statements or the financial words they put up, numbers they put out every every quarter to make sure we still want to have their stocks.

Sara Yeah. And I'll take that one step further back to Warren Buffett. Warren Buffett thinks that Warren Buffett is knowledgeable enough to pick stocks. Warren Buffett does not think his wife is knowledgeable enough to pick stocks. And so in one of those letters, I think you've read this one in one of those letters, he said. When I die, you know, I have directed my wife to direct her advisers to buy 90 percent of an index fund and put 10 percent of it in cash or bonds or something more stable. Because Warren Buffett does not think that other people should be picking stocks like Warren Buffett does because it requires special information and special skills, like most of us don't have those special skills. Right?

Caitlin So if it's your full time job and you're good at it, you get to do that. But for the rest of us, I have to assume he's not denigrating his wife. It's she's smart about other things. She does other things, but that for most people, it just makes more sense to put your money in an index fund. Exactly.

Sara You know, he's making that very clear like, OK, there is a special skill set that not everybody has. And if you don't have it, do this other thing by a fund, a mutual fund or an index fund, something that is a bunch of investments in one basket. And then don't worry about it.

Caitlin So you say, Warren Buffett, I love that he's the point of reference right now, is very stock market focused. But there are bonds which we hear about too. And the extent of my knowledge before I took your class about a bond was that it was something on the monopoly board and that it pays you money on the monopoly board, but not as much as rent does on a hotel or something. So it seemed like, you know, it's better than nothing, but compared to other ways of making money on the monopoly board and not amazing. Is that a good description of what a bond is?

Sara Yes, that's an excellent description. We talked about how a stock is ownership. You own part of this company. A bond is lending money to someone so you can lend money to a company or a country or a person, whoever. And then the deal is I lend you a thousand dollars. You agree to pay me five percent per year on my $1000. And then at the end of 10 years, let's say you pay me my thousand back. So that's a very different relationship. It's a contract, right? Like, if we had that agreement, Caitlin, we'd probably write it down, right? We would write down it's like an IOU.

Caitlin If I'm the person you need to borrow money from, I just want to make sure that you're expecting it like, Well, what do you need to buy? So, OK, but your point is where it's a contract, like when I borrow money for my mortgage or whatever, like I go to the bank and I say, I need this amount of money and they say cool or not cool, but you have an interest rate, so you'll pay us back what you owe plus x amount of interest rate. Also, the bond is the same thing.

Sara Exactly. Yes, they are. Mortgages bond. Loans, any lending instrument. They're all basically they're different variations of the same concept. So yes, perfect with the mortgage you go to the bank, they say, will lend you $200000 in the interest rate is 3.5 percent. You have 30 years to pay us back. Same thing with bonds because that relationship is written down for one thing and because it's not as risky. You know, if you loan someone money and they don't pay you back, or if you Caitlin, take out a mortgage and you don't pay your lender back what?

Caitlin They take my house and sell it.

Sara They take your house. They have. It's called recourse, right? Most lending arrangements are some type of recourse. There's something bad that will happen if you don't pay them back. So you go to court, that's what bankruptcy laws are for. And so for all those reasons, it's a safer investment. The main tradeoff in finance is if you are taking less risk, you have an expectation for lower rates of return. So bonds are safer, so you would expect a lower rate of return for lending someone money than you would for, say, investing in their new business or investing in someone else's currently operating business.

Caitlin But that so crazy. I never thought of it that, you know, I have a bond index fund or whatever, but I never realized that I'm the bank in that scenario. How crazy I am asking the bank to lend me money for my house. And then I'm lending random companies money with my money, making money off of the interest rate that they're paying back for the money that I lent them. This is a crazy system we have.

Sara I know, but that that's the system, right? Like, some people need money and some people have money. So the people who need to borrow money and the people who want to lend money, you get matched up in the debt system, right? Like that's what mortgages, the mortgage market and the bond market and the loan market and all of these other lending type markets. You're matching up people who have money with the people who need money and specifically who want to borrow money instead of like bringing on a partner. So, I mean, it's huge that bond market is way bigger than the stock market. You can imagine that you probably have more dollars either lending or borrowing right now. If you have a mortgage, right, you have borrowed money from someone and it might be a lot more than what you have in ownership. But anyway, the debt market is huge. It's like in the trillions, trillions and trillions and trillions of dollars huge.

Caitlin I know that debt is large, but how come we don't hear about the bond market? Like, I didn't even really think that was afraid the stock market, I feel like you could hear without trying to every day of your life bond market? No. Why does it get less? Is it less sexy?

Sara Yes, it's less sexy, but even more so than being less sexy. It is dominated by Wall Street. So when you talk about Wall Street, Wall Street, you're probably actually talking about the bond market and not necessarily the stock market, because there are so many of these transactions taking place, people borrowing and people lending. The bond market is so much bigger than the stock market that it's really dominated by Wall Street. And it is not a place where retail investors where normal investors really tread right, like you don't directly lend money to Apple, but Apple would go to the bond market and borrow $500 billion or something like that. And that $500 billion bond issuance would be put together by Wall Street by one of the huge investment banks that are on Wall Street. And so it's just it's not a place that retail investors like retail investors don't buy and sell bonds like they buy and sell stocks. One of the reasons is that basically all stocks are the same. Like all, shares of Apple stock are the same, so your shares are the same as my shares. But bonds can all be different, right? Because they're all basically loans. Ford might have 40 different bonds that are currently outstanding. That means they've borrowed money 40 different times under 40 different sets of circumstances. And so each of those 40 circumstances have has its own bond. But as a bond investor, you have to figure out, do I want to buy the bond that was issued in 2016 or the bond that was issued in 2020? Well, it depends on the interest rate, it depends on the payback and it depends on the collateral that was posted, if any. And so like like I can already see, like your face is like, you know, like I'm not doing

Caitlin like who has time to look at this, but bond traders do. I mean, yeah, I guess that's their full time job because on the one hand, you're saying bonds are safer, but also like in Monopoly, you don't make as much money from them in my association. With anything having to do with Wall Street is they're in it in a cutthroat business to make as much money as they can. And now you're telling. Me, but they're mainly in bonds, not in stocks, and I don't know how to put that puzzle together.

Sara Yeah, so think about this. So I just described those 40 different Ford bonds. If you are a bond trader who has special knowledge about the bond market, you will know how much you can mark up the price of a bond to sell it to someone who wants it. So the bond market is full of people with special information, and that special information is worth money to them. Right. So you have way more people who can be in the middle than knowledge just can be much more specialized, which means there are many, many more places for markups on the bonds. It's not highly liquid. It's not highly transparent. It's a huge specialized market where there's lots of room for someone to come in and buy a bond for $100. Knowing that instantaneously, they can flip it to someone for a hundred and two dollars. That happens all the time, and that's really where you know you can make money in the bond market is knowing how much can you buy something for over here? And then, you know, someone else is looking for it. You can flip it to someone who you know is looking for, you know, a contract like that that pays that type of interest.

Caitlin So this whole time, I've been thinking of the stock market as the super exclusive club. But really, the bond market is this super super like you have to have a cigar, a tuxedo and a summer house to get into that room. Yes, and they make a ton of money. Yes. And they do it kind of in a way from the public view.

Sara Yes, absolutely.

Caitlin For the purposes of a normal person like me, I use that term loosely. I don't have to know that much about it because it's not my full time job. And so whatever I dabble into the bond market, I would definitely do as an index fund because I don't have the time or resources to understand even half of what you just said much, much less to make a choice about which you're for it. I mean, it's like what year wine bottle you would invest in, right? Like you? You have to know a lot to make a

Sara bond, sommelier. Yes, most of us are not bond sommeliers. So we just buy index funds.

Caitlin How did you learn all of this? How did I learn? How do you know this? Yeah.

Sara My first job out of business school, I worked for a hedge fund here in town in Austin, and we were active in the bond market. So we were basically financial advisors for entities that wanted to raise money in the bond market.

Caitlin Did you have a tuxedo?

Sara I didn't, but I will tell you, you know, part of the boys club aspect of it was was a turnoff and I didn't end up staying. I liked what I did, and I learned a lot about what I did. But you certainly at that point in time, oftentimes you were the only woman in the room.

Caitlin That is not a surprise to me, but it's interesting just to hear in real time that part of it is a gender dynamic because really what we learn about every day in the Austin Women's Investing Group and you do and just in your job is how gendered financial knowledge financial access is. And so that's one of the sort of frontiers is the secretive bond market where it's harder for women to break in and those that do don't feel super comfortable are welcome.

Sara Yeah, and hopefully that's changing. But certainly when I think of Wall Street as being still a boys club, I think about the bond market more than the stock market. I think there are more barriers to ending up in a job where you get really deep knowledge of the bond market. There are probably still more barriers in the bond market than there are in the stock market. I mean, because again, like the stock market, the actual barriers to entry are somewhat limited, right? Like someone with a lot of time on their hands to learn and to learn about companies and trade stocks. The barriers are a lot lower than that same deep knowledge base that you would need to navigate the bond market right. The bond market structure is very different from the way the stock market is structured, so I think you kind of need like a guide into that environment in order to really be super successful in the bond market. I don't think it's a place where self-starters would make it very far. You need someone to take you into the depths of the bond market in order to get really good at it and to get access to the types of investors who are in there and the types of entities that are in there, the type of institutions that are investing lots of money in the bond market.

Caitlin So when we're talking about investing now, even in the Austin Women's Investing Group and in general for people like us, it's really the stock market we're talking about in the bond market is like sort of a buffer to not be too exposed in the stock market. There are not many bond market investing 101 classes, for instance. I'm. Saying that because you teach a stock market one on one class, but you don't teach a bond market one in one class, right?

Sara I think for individual investors, the advantage to bonds is that they're not stocks. You own bonds for stability. No retail investor. No regular investor trades bonds. Again, for all those reasons that I just described, like you just don't have the knowledge base, even less knowledge base to trade bonds than you do to trade stocks. So the bonds that we are participating in are probably through bond funds. We're not buying and selling bonds very often. The bond market is less volatile for a lot of different reasons. So for most of us, putting together a portfolio of stocks and bonds or stocks and bonds and real estate, whatever, really, the reason you own bonds is because some part of your money needs to stay relatively stable, and in exchange for that stability, you get a lower rate of return. And that's what that portion of your portfolio is for.

Music transition by Bad Bad Hats

Sara Caitlin, what is one thing? A woman on the verge can do today to move forward on her financial journey?

Caitlin OK. I can't remember if it was last episode, but you talked about how important it was to figure out how much money was going out, which I specifically remember because I always get anxious about figuring out my grocery budget, which you say is totally meaningless. OK? So I think the other side of that is how much money is coming in. And for some people, that's super easy. You look at your W-2, that's your only income. So that's the number. And others of us who have a lot of different irons in the fire side hustles, gigs, whatever. It's a really complicated question. There's a lot of tracking down of how much did I make on that? What year did I do that project? So figuring out how much money is coming in, would you say for the year is OK or by the month? Or do you just don't care? It could be, either.

Sara I would say for the year,

Caitlin for the year. OK, so how much money came in last year or the year before? And you can figure that out from your taxes if you filed them, but sometimes that has a lot of depreciation in it from, like your business expenses or whatever. So we want to find out like just the total that came in. And the first thing that that makes me think of is, are you getting paid? What you're worth? Like, there's what you're getting paid. And then is that an OK number? And I feel like especially for women, we are just really ready to accept what someone will pay us for many good reasons, but that today what you can do is not only figure out how much is coming in or just ask yourself a question, am I being paid what I'm worth and start that thought process? Maybe by Googling What is someone in your position or doing what you do? What's the range there? Are you in that range? Are you at the top end or are you at the low end? Just start getting a sense and that that's it. Just ask yourself that question. Are you getting paid? What you're worth?

Sara You know, I really love that answer because the income side of the financial picture is often one we kind of skip over or take as a given. So I feel like what you said about knowing your worth that is probably something we can unpack in a future episode to spend a little bit more time on the income side as we move forward because it's very important to financial health.

Caitlin Yes. And about talking about money and finances and even setting financial goals for yourself that you feel like how could I ever achieve those? How could someone like me? Or how could I ever earn that much money or make that much money and investments? Part of it is a mindset change and figuring out what the reality of your own situation is. Maybe there's a million reasons why you're not getting paid. What you're worth. That's OK. Just ask yourself the question and maybe do a few little research inquiries to figure out how you could even figure that out.

Sara I really love that. Thanks so much, Caitlin.

Music transition by Bad Bad Hats

Sara Hey, do you have any dumb questions about finance or investing? Send them to us at our website womenontheverge.com.

Caitlin Hey, so many thank you's to Kelly West, a woman on the verge in her own right who took the amazing photos for her album, art and website helped with our website design, music, audio editing, cheerleading, mental health, everything. Emily Klein, surrogate, our stylist that did our hair and makeup for our photos from Lucy Skyrocket. Lauren Gross and Taylor Gross, who helped us with our graphic design

Sara and our music is by Bad Bad Hats and Devmo.

Caitlin This episode was edited by Jes Rowe.

If your partner is making you ask for money, giving you an allowance, taking your money or not letting you know about or have access to family income. This could be economic abuse.

Sara Learn more at thehotline.org or call one 800 799 safe.

Caitlin So Sara Because you're a financial professional, we have to read a disclaimer for this podcast.

Sara I would actually really love it if you could read the disclaimer and your best legal voice. Oh my

Caitlin God, the legal voice. OK, doing it. This podcast contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this podcast will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Music outro by Devmo

Devmo The first thing you notice is that I'm covered in gold
The flick of the wrist it could turn a hot bitch cold
To get what you want in life girl you gotta be bold
Now Imma die rich