by Sadaf Ahmad

Created on: September 13, 2010

As many women can testify, understanding money is like getting comfortable with a foreign language. The way to begin feeling at home with money is the same way you'd learn Spanish or French: by relating it to what you already know. With this in mind, many of the basics of investing may not seem so foreign after all.

* INVESTING IN STOCK IS SIMILAR TO BUYING A HOUSE

You can understand the principle behind investing in stock if you've ever owned a house and sold it for a profit.

When you buy stock, you become an owner of a company. (Actually, you share ownership with other investors – this is why stockholders are often called shareholders.) You hope that when you sell your stock, it will be worth more than you paid, letting you pocket a profit.

Many stocks also have an advantage that home ownership can't match. They pay dividends, giving you a share of the company's profits every quarter. When you think of stocks, think ‘I own’.

* INVESTING IN BONDS IS LIKE PUTTING MONEY IN A CD

If you've ever earned interest on a certificate of deposit, you understand the principle behind investing in a bond. You're loaning your money for a certain period of time to a company, government unit, or even the U.S. Treasury. The debtor gives you its "bond" (as in, ‘my word is my bond’) promising to pay you a fixed rate of interest and return your principle at a certain point in the future. (Despite this promise, however, bonds are not federally insured like CDs). When you think of bonds, think ‘I am owed’.

* DIFFERENCES BETWEEN STOCKS AND BONDS

As for the stock and bond markets, imagine them as two auction desks in a tent full of investors who are ready to buy if the price is right. Some investors need steady income, so they concentrate mainly on finding the best bond deals. Many others try to keep an eye on both desks so they can jump into what’s hot and out of what’s not.

On the stock side, the action is pretty straightforward There's usually lots of demand for the stock of companies with good prospects, so investors tend to bid up the price. By contrast, the stock of a company with bad prospects becomes cheaper – the Wall Street equivalent of a fire sale. Prices may change constantly during the course of a day, according to what buyers are willing to pay.

The bond market is driven by demand, too. When a company, state, or city decides to raise money by floating a new bond issue, it has to pay an interest rate attractive enough to entice investors without bankrupting itself.

If the bond is viewed as relatively risky, the issuer has to pay a higher rate to reward investors for taking on the extra risk. That's why super safe Treasury bills, backed by the U.S. government, pay investors less than high-yield corporate bonds, whose greater risk is evidenced in their nickname, ‘junk bonds’.

Stripped of its jargon, the Great and Powerful World of Investing is really just a glorified bargain barn. In fact, women's experience as smart shoppers tends to make them excellent investors. Knowing how to choose efficiently, recognize bargains, and learn from past mistakes is a priceless advantage in the stock market or bonds.

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