How does money seriously work?

**GREENBACK** · 09-29-2011, 12:44 PM

Originally posted by dvarn16 View Post

I don't understand how money seems to work. I may sound stupid, and maybe I am. But money is something I have never had to deal with at age 18, with the exception of some actual CASH from working for family. Let me ask some specific things that will likely help me clear this up, and make me feel less stupid. And after reading these and answering them, please also tell me if you think I am stupid for asking this as an 18 year old. Again, it's not something I've ever associated myself with. AND PLEASE SIMPLIFY THE ANSWERS SO I CAN ACTUALLY UNDERSTAND IT.

1) What exactly is the stock market, and how does it work? What does it mean to "invest" in certain companies, or buy stocks? How does a stock market percentage drop then cause other people (who have invested) to lose money?

2) When paying common household bills (mortgage, electricity, heating, etc.), how does that money actually get deducted from your bank account? Do these companies have your information, and then take the money when it is due? Or does the consumer have to like mail a check in or something? How do you go about such a process?

3) How does the banking system work? What exactly causes the issues that I am always hearing on TV, such as things like "(name of bank) is currently undergoing (blah blah blah) and your money is at risk" or something? I have always thought that a bank was simply a place where you basically electronically store your money, but it's obviously much more advanced than just that.

4) How do checks work? How does a little slip of paper that anyone can fill out and hypothetically forge a signature on transfer money? If a check is written to me from someone, how does that person actually go about having an amount of money added to your banking account? It has to be a pretty complex system, because like I said, anyone can forge a signature and get money from anyone they so please.

5) Am I stupid for asking these questions? While I know I have never been exposed to this stuff, and it's not something that is basic common sense, it's not STUPIDITY. However, is it something that I am most likely way behind in understanding as an 18 year old now? I feel so pathetic...

Asking the questions you have asked is very smart of you. I'll try to answer your questions in a short way that you can understand. Others here may wish to elaborate.

1) Companies offer "shares" or small pieces of ownership for sale to investors through the stock market. This allows them to operate and build their companies. When you as an investor buy a share you own a piece of that company and it's value. You can buy as many of those shares as you like. If the value of the individual share goes up you make money and vice-versa. It's important to remember that you don't actually lose or gain money until you sell your shares. It's just a value on paper until then.

2) You can mail a check or have money automatically deducted. When you set up an account it will be explained. You will be asked to provide the neccesary information. It's easy to do.

3)It you have money in the bank and it's FDIC insured (it will be) don't worry about this. They are talking in far broader terms than individual bank accounts.

4) A check is just a note linked directly to the money in your account. That's why all those numbers appear along the bottom. It's as much for convience and security as anything. They can be forged but it's not much of a concern in my experience. If you lose your checks you should call the bank and let them know as soon as possible.

5) It's good to ask questions like this while you still have lots of time to learn. I'd recommend opening a checking account and becoming familiar with the various financial tools available. Hope this helps. Others here may have more to offer on this.

**Petunia 100** · 09-29-2011, 01:20 PM

I wish I had been smart enough at 18 to be asking these questions.

You have already received good answers to all of your questions, but I would like to address question #1.

This is what I told my kids when I was teaching them about investing:

A little company, such as Joe's Hot Dog Stand, is probably owned only by Joe. A large company, such as Wal-Mart, is far too huge for one person to own all by themselves. Instead, it is split into many tiny pieces with different people owning each tiny piece. That is all a stock is, one tiny piece (called "share") of ownership of the company.

The stock market is the place where people can buy and sell stocks to each other (called "trading").

When you buy a stock, you pay a certain price. Suppose you pay $20. If it trades at $19 the following week, you have "lost" $1. It is only a real loss if you choose to sell. Next week it may trade at $18 or $21. You only lock in your gain or loss on the deal when you actually sell, until then, it is all theoretical.

Any number of things can impact stock prices in the short-term. But over time, there is only one thing determining the price of a stock. That thing is profits. If the company is profitable over time, then the stock price will rise. If the company is not profitable over time, then the stock price will fall.

**snafu** · 09-29-2011, 03:00 PM

dvarm: actually, you are smart to ask questions about how the financial system works. You didn't mention Credit Cards [CC] which are used to buy something now and defer payment until a later date. People often get into difficulty by using more credit than they can pay for. Somehow some people disengage from the idea that spending on a credit card was merely a delaying process. A delay is interpreted as a loan to the credit granter [card issuer] and they charge a fee called interest. Interest is added to the cost of purchase leaving the buyer to pay a larger amount. The cost of credit [interest] is very important as it can make any purchase far more expensive than the sum 1st borrowed.

Banks are also important sources for borrowing money. People making significant purchases, a car for example, often are funded from bank to vendor. Payments are automatically withdrawn from your bank account each month to re-pay the loan. Payments include interest, the sum the bank charges for your using their money. Some banks charge a fee in addition to the interest charged.

**maat55** · 09-29-2011, 05:30 PM

I highly suggest you read a few books on personal finance and investing. What you will learn, if applied, will do you far more good throughout your life as any college degree.

I recommend these books:

The Total Money Makeover by Dave Ramsey
The Automatic Millionaire By David Bach
Personal Finance desk reference (any addition, latest preferable)
Investing for dummies

The key to prospering is to simply follow some basic fundamentals.

Invest at least 10% of your income.
Have at least 3 to 6 months expenses in savings
Only use credit cards when you can pay in full each month.
Limit your house payment to no more than 25% of your take home pay.
Pay cash for all consumption items like: cars, TV's etc.

When you set specific guidelines, it makes you make choices differently than the normal broke person. Good luck.

**photo** · 09-29-2011, 06:02 PM

2. When paying common household bills (mortgage, electricity, heating, etc.), how does that money actually get deducted from your bank account? Do these companies have your information, and then take the money when it is due? Or does the consumer have to like mail a check in or something? How do you go about such a process?

Let's simplify this. You use $75 worth of electricity for a month, so the electric company sends you a bill for $75. In the "olden days" (earlier than ~1995 or so), you would write a paper check and send it in the mail to the electric company. Also, I seem to remember that sometimes in grocery stores, in the customer service area, people could pay their electric bills there.

Fast forward to the internet age. Instead of writing a paper check and mailing to the electric company, I input my user name and password on my bank's website. There, I have the option of paying a bill online, which means that I tell the bank to pay the electric company $75. The electric company does not at all have access to my account. I simply tell the bank whom to pay. It's like a paper check, but it's done electronically, so it's quicker, and there's no chance of it getting lost in the (snail) mail.

4. How do checks work? How does a little slip of paper that anyone can fill out and hypothetically forge a signature on transfer money? If a check is written to me from someone, how does that person actually go about having an amount of money added to your banking account? It has to be a pretty complex system, because like I said, anyone can forge a signature and get money from anyone they so please.

You have, for example, $1,000 in your checking account. Instead of carrying around $1,000 in 20 and 50-dollars bills, you instead carry your checkbook. So, at the grocery store, if you spend $50, you write a paper check for $50, and then that amount is deducted from your checking account. Your checkbook of checks contains pre-printed checks with your name and address on them.

If I write you a check for $50, then you have to go to a bank or somewhere that will "cash" (used as a verb) your check. If you go to a bank, you then "endorse" (sign the back of the check because it is written with your name in the "pay to the order of" line) the check, and the teller gives you $50 cash. If you wish to deposit that check in your account, you can do that as well. However, you will never get the $50 until you "cash" the check.

**feh** · 09-30-2011, 09:38 AM

These questions are difficult to answer in only a few dozen/hundred words. You may want to do some reading. Here are a few (I haven't read any of them) you might want to see if your local library has:

Amazon.com: Economics For Dummies (For Dummies (Business & Personal Finance)) (9780470879481): Sean Masaki Flynn: Books
Amazon.com: Investing For Dummies, Fifth edition (9780470289655): Eric Tyson: Books
Amazon.com: Personal Finance Workbook For Dummies (9780470099339): Sheryl Garrett: Books Amazon.com: Personal Finance Workbook For Dummies (9780470099339): Sheryl Garrett: Books
Amazon.com: Managing Your Money All-In-One For Dummies (9780470345467): Consumer Dummies: Books

**jpg7n16** · 09-30-2011, 09:02 PM

Originally posted by dvarn16 View Post

1) What exactly is the stock market, and how does it work? What does it mean to "invest" in certain companies, or buy stocks? How does a stock market percentage drop then cause other people (who have invested) to lose money?

A stock is a small piece of a business.

The stock market is where people like you and me trade those shares between each other. When you buy a share of Coca Cola (KO), Coke isn't up printing off new shares of stock and selling them to you. You're actually buying shares from some guy named Steve in North Carolina.

The stock market is like StubHub for stocks. People everywhere can buy/sell tickets (shares). The stadium (company) originally sold the tickets (shares), and you may be buying them for more/less than they're actually worth. You're not buying from the stadium anymore, you're buying from each other.

And I find it odd that people say 'you only lose when you sell' about stocks, but not about cars. When you drive that new car off the lot, people instantly won't pay as much for a used car as they would for a 'new' one. It's worth less, you lost money.

When you paid $10 for something that's only worth $8 now, you've lost $2. Maybe you'll make it back, maybe you won't -- but for right now, you've lost $2.

3) I have always thought that a bank was simply a place where you basically electronically store your money, but it's obviously much more advanced than just that.

It is. But it's also a place where you can get access to your money if needed. You can also allow others to get access to some of your money (checks, debit cards, electronic debits, etc.)

4) How do checks work? How does a little slip of paper that anyone can fill out and hypothetically forge a signature on transfer money? If a check is written to me from someone, how does that person actually go about having an amount of money added to your banking account? It has to be a pretty complex system, because like I said, anyone can forge a signature and get money from anyone they so please.

A check is a piece of paper that says "I give this guy this amount of my money that is stored at this bank."

When you open a checking account, they make you sign a document called a signature card. This then keeps a copy of your signature on file. They pay some guy to verify that the signature on the check matches the one on the document you signed.

They also send you statements - so you can see all the checks that cleared your account, and have a process to dispute a check if one slips by.

5) Am I stupid for asking these questions?

No.

Successful people ask better questions, and as a result, they get better answers.
-Tony Robbins

**Frugal** · 10-03-2011, 09:45 AM

When you put bills on automatic deduction, the bank withdraws "X" amount of funds on "X" day, each month or on a recurring basis, per the owner of the account's request. You have to fill out a form authorizing the bank to deduct the money automatically and send it to the utility company or whichever other company each month. Typically, deductions are set up to come out around the same time each month. This is usually called something like "Auto-Pay". There is usually (At least with my own credit union) not a fee at all to set up bill payment automatically. Some people set up auto-pay on such things as student loans and mortgage payments. Personally, I prefer to have some oversight over these important payments, to make sure the bill charges the correct amount, and the bill is sent out when I want it to go out.

Many companies also allow you to make individual payments online on their websites (utility cos., cell phone cos., etc.) so that you don't have to set up recurring auto=payments with your bank.

Hope that helps.

Try to take a finance class or basic home economics type course if you plan on enrolling in college. Sadly, high schools don't teach the basics of life after 17 or 18 much anymore. There are good books in most local libraries about these topics, or ask your parents how they handle bills.

**jteezie** · 10-04-2011, 09:05 PM

These are some very broad questions. I'll take a shot at explaining them on a high level then directing you to look up some key concepts.

1) If you hold onto money, it loses value over time due to inflation so you want to keep the value of your money. That's why people invest. People choose to invest in stocks because the companies that issue the stock take your money and use it to make money. You give them $100, they take $50 to pay wages, and the other $50 to make widgets, which they sell for $4 each, so they earn $200 - 50 (wages) = $150. So your share of the company is now $150. When you sell, you earn $50 profit.

The catch is that stocks prices are based on expectations of future earnings (you expect they will be able to sell widgets at $4). When expectations change, stock prices also change. As far as why prices also change when people sell, it's due to supply and demand, an economic term.

Note, I really simplified the concepts.

2) Nowadays money is pretty much just numbers on computers. You have an account number which says you have $ X money. When you pay bills online, you're telling the bank to add/subtract numbers from your account and give/take it from another account.

This works because of accounting. Debit/credits make sure all transactions are equal.

3) Banks work because countries have central bank authorities (America's central bank is called the "Federal Reserve," aka "The Fed"). Central banks tell commercial banks how they can work. The key thing is the "reserve requirement." a 10% reserve requirement means a bank only needs to hold 10% of your money at the bank. So you deposit $100, the bank holds onto $10 and lends out $90 to somebody else. That person then deposits $90 to another bank, which holds $9 and lends $81 out... and so forth. This is how our banking system works.

These "money at risk" people are trying to say that if you aren't the first 10% of people to go to the bank to get your money, there won't be any money left (this is call a run on the bank). Back in the 1700's before central banks this was the case (and I guess also the 1920's when EVERYONE freaked out and lost all trust in the banking system), but nowadays the FDIC insures up to $500k, so if your local bank doesn't have your money, the government will guarantee that you get your money. This eliminates almost any risk of run on banks.

Another thing to note about Central Banks is their ability to create "fiat" money. Fiat money is pretty much just paper that has no meaning except that the government says it has value. So long as Central Banks are responsible, people will believe the money has value and are willing to use money to buy/sell/trade/invest.

4) See #2 above.

Forgery is certainly possible, but there are laws against it to deter people. Plus, few people would idly let somebody else withdraw their money from their bank account. Your money can be accessed by anyone that knows your account number. It is the same idea with credit cards. Anybody with your CC number can use it to buy stuff. But keep in mind the debit/credit thing I mentioned earlier. If somebody forges a check, the money goes from someone to somebody else. It's pretty easy to figure out who it went to or to trace the paper trail.

5) I recommend studying some economics. For some theoretical stuff (it has very real world implications and will help you understand what is happening in the world), look at Fiscal policy and Monetary policy.

More practical stuff include personal finance books which others have pointed out already. I'd recommend "The Millionaire next door"

**Bsnrjones** · 10-12-2011, 01:29 AM

it sucks us every month for continuous 30 days, and other sucks us as soon as we get it...
that's how it works ...u get and u give...!

How does money seriously work?