Everything You Need to Know About Investing for Beginners
Think of investing as casting a vote with your dollar. Your investments directly support the companies in which you choose to invest.
For those new to investing, getting started can seem daunting. But at heart, investing is simply a means to move toward the life you want. It’s making a plan with your money so you can pursue both your big dreams and everyday improvements.
If you’re considering getting started with investing, let’s first consider your financial goals. Where would you like to be in the next five years? How about 10 to 20 years?
Working remotely from a wi-fi connected beachfront cottage in Aruba?
Opening a bakery or microbrewery?
Paying off your student loans, once and for all?
Once you’ve got a few scenarios in mind, let’s consider the practicalities: Are your finances working as hard as they can to help you get where you want to go?
This is where investing comes in. Investing can enable your money to grow over time, faster than, say, a standard savings account. Investing can give you more capital and flexibility as you pursue the life you want.
Which means those far-flung goals may actually turn into any-day-now accomplishments.
Sounds great, you may be thinking, but I don’t know anything about investing!
No worries, newbie! Every investor has to start somewhere. Let’s dive right into the basics of investing.
What is Investing?
So, what exactly does investing mean?
Simply put, when you become an investor, it means you’re buying the stock of a public company. You’re literally buying a part of a business. When you buy a stock, you're not just tucking your money away in a bank like with a savings account. You’re buying an ownership stake in a business, also known as becoming a stakeholder or a shareholder.
Think of it like casting a vote with your dollar. Your investments directly support the companies in which you choose to invest.
Next, let’s delve into some basic investment concepts, strategies, and personal factors to consider when making investment decisions.
What is Interest?
When it comes to investing, every investor needs to understand how interest works.
Interest is the price you pay to use someone else’s money.
If you have a credit card or student loan debt, you’re already well familiar with how interest can add up over time.
But with investing, you’re the lender, not the borrower, and interest works in your favor. Depositing money into an investment account is like lending money to a financial institution. And the financial institutions you’ve invested into may pay you interest periodically on your contributions, meaning you may earn money on your deposit over time.
Note that the amount of interest paid, and how often it gets paid, is primarily based on the type of investment account you choose. Depending on the type of account and its terms and conditions (e.g., the fine print), interest may compound over time. Compounding interest lets you earn interest not only on your original deposit, but also on any interest you earn on that deposit. It means your original deposit grows much faster than it would with simple interest!
Which Investment Options are Available?
You’ll next want to figure out which investment options make sense for you. There’s no one-size-fits-all determination, and how you allocate your investments will depend in part on your investment goals, time horizon, and risk tolerance. If you’re investing for retirement down the road, for example, the risk of your portfolio will most likely be different compared to an investment for a goal you’d like to reach in the next five years.
So, which investment options are available, and how will you know the investment types that make sense for you? Here’s a quick rundown of common investment options and how they work:
- Essentially a loan to a corporation, city, organization, or government, a bond represents a written promise from the borrowing institution to repay that debt over a certain period of time (e.g., 10 years). You, the investor, are usually paid interest on the principal.
- Bonds are generally considered less risky investments than stocks, but note that their value generally rises and falls with market interest rates, so it is possible to lose money.
- Mutual funds are a professionally managed collection of investments, generally stocks and/or bonds, chosen by a fund manager. Investors can purchase one or many shares of a mutual fund.
- Mutual funds pool your money with other investors, so you’re essentially joining a group of shareholders when you invest your money this way.
- Because the risk is spread out over many investments, mutual funds are generally considered less risky than an investment in a single stock.
- Also called a share, a stock represents a piece of ownership in a company. A person who owns stock (aka a stockholder or shareholder) owns a piece of the company.
- Stocks can typically provide strong returns, but know that they’re also considered the most risky investment of the options listed here. Nevertheless, it’s worth noting that, even within this relatively risky investment class, some stocks are considered safer than others. Remember that the potential for loss always exists.
With investing, you’re not limited to any one option. You can invest in stocks, bonds, mutual funds, or any combination of the three!
Still not sure which investment options are right for you? Speak with a fiduciary (e.g., a licensed financial professional dedicated to working in your best interest) to get the lay of the landscape.
What are the Risks of Investing?
Risk, in terms of investing, refers to financial losses and can vary with investment type. If you save $1,000 in a savings account, for example, your $1,000 won’t really fluctuate over time: You’ll likely earn interest, but that initial $1,000 won’t budge. But if you took $1,000 and invested it instead, there’s a chance that amount could be lower in the future. It all depends on the category of investments you choose and the state of the market.
As such, it’s important to understand the risk you’re taking on with any investment, as you’re never guaranteed a positive return. But if you’re careful in spreading out your risk, you can minimize your chances of loss.
Many investors manage their risk exposure through diversification: They allocate their money across many different investment types, pairing options that may be risky with those considered safer, so they’re more protected overall. The old adage “don’t put your eggs in one basket” is a simple way to think of this strategy.
A Sum-Up for New Investors
As you start your investment research, remember:
- Interest allows you to earn money on your deposit.
- You can invest in stocks, bonds, and mutual funds.
- Different investment options have varying features and returns.
- Always understand the risk associated with any investment decision.
- Investing may be a faster way to reach your short- and long-term goals.
Remember those personal goals you thought about earlier? A tailored investment strategy may take them from idea to reality.
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