Not really!
I’m going to assume all you self employed people know how and where and when to invest God’s surplus in your own businesses. Thus, I’m going to discuss investing only in other already existing businesses from here on out. I mentioned earlier that there are two ways to invest in other already existing businesses. We can buy part of a company or we can loan money to a company.
When we buy part of a company we become one of the owners. Our ownership is represented by “shares” of stock. When we buy a share of stock we are referred to as “stockholders” or “shareholders”. The price we pay for a share of stock is determined by the value of the company divided by the number of shares of stock available/outstanding. The price of shares may fluctuate moment by moment when they are traded on one of the stock exchanges. So how do we earn a return on investments when we become owners of the company? There are two ways to earn a return. First, if the company makes a profit, it may choose to share the profit with stockholders by distributing it (the profit) in the form of what we call dividends. The amount we would receive in dividends is determined by the amount of the profit to be shared (the company might choose to share only some of the profit), the number of shares of stock outstanding and the number of shares of stock we happen to own. The second way to earn a return on our ownership investment in a company is by taking advantage of an increase in the value of the company. An increase in value of a company is reflected in an increase in the price of the stock. For example, if we purchase one share of stock in a company at a price of $10/share and one year later we sell that share of stock for $11/share we would have earned a 10% annual return on investment (we naturally have to actually sell the share of stock to realize such a return). If during the same year-long period the company was sufficiently profitable to also declare and distribute dividends of $1 per share, we would have earned another 10% on the investment. Naturally, we receive this return only if we own the share of stock at the time the dividend is declared. There is a huge industry employing thousands of people all trying to figure out (guess) what’s going to happen to the profitability, values, and stock prices of all the companies that make up our economy as well as the economies of foreign countries around the world. The reason I say “guess” what’s going to happen is that nobody (with one exception and He isn’t telling) really knows what’s going to happen to any of these companies.
The second way to invest in an already existing company is to lend it money. The way we lend companies money is by buying “bonds” issued by the company. We can also lend the government (federal, state and/or local) money by purchasing bonds issued by them. Bonds are basically IOUs. They are promises to pay back at a specific time in the future the amount we lend the company or government plus a fixed, predetermined amount of interest. The date set for repayment is called the maturity date of the bonds. The rate of interest paid does not change during the life of the loan or bond. The amount we lend is referred to as the “face value” or “par value” of the bond and most bonds are offered in $1000 denominations.
Enemies of Investing
Based on what the Lord has to say about saving and investing, I want to do the very best job I can. In order to do a good job we need to be aware of two primary “enemies” of investing: inflation and taxes.
You all have heard the term “inflation”. It has a significant impact on God’s money and contrary to popular belief there is something we can do about it. Very simply put, inflation is just a persistent or continuing rise in the general or aggregate level of prices. By general or aggregate level of prices, I mean the average price of everything lumped together. Another way to think about inflation is to describe it as a decline in the purchasing power of money. One of the reasons money works so well in the US is that the government of the US has been relatively successful in controlling inflation or maintaining stability in the purchasing power of money. If the government chooses to flood the economy with money by printing or borrowing, then inflation will devastate the purchasing power of our dollars. This has happened in some of the Central American countries.
But you may be wondering how on earth can we come up with an average price of everything lumped together? First of all we aren’t really concerned about the actual price but rather the way in which prices change over time. For example, if we all kept track of the prices of everything we bought and averaged the prices of each item and then weighted each one by the proportion of total expenditures it represented, we could arrive at a general level of prices from which we could then calculate an index number. We could then compare the index numbers from month to month to see how they changed over time. Obviously, it is not practical to keep track of all our purchases in this way, so the US Bureau of Labor Statistics (BLS is in the US Department of Labor) estimates this index number every month and calls it the “Consumer Price Index” or CPI. The Consumer Price Index is used to measure the average change over time in the prices paid by urban consumers (87% of the US population) for a fixed market basket of consumer goods and services. More than 30,000 individuals and families are involved in determining the composition of this market basket of consumer expenditures. Each month, BLS data collectors called “economic assistants” visit thousands of retail stores, service establishments, rental units and doctors’ offices all over the US to obtain price information on 80,000 items used to track and measure price change in the CPI. The items/expenditures are classified into more than 200 categories and eight major groups. The goal of the CPI is to measure inflation as actually experienced by consumers in their day-to-day living expenses. If the government can be trusted to honestly and objectively carry out this methodology, without politicizing it, then I think it is a pretty good measure of inflation.