Investing can be as confusing as it is exciting! Being a beginner in the investment world can seem challenging, but we’re here to break that down for you. Investing is the art of putting your money to work for you so it can grow and multiply over time. Sit tight while we explore the world of investing and make your money start working for you!
Breaking it Down: The Basics of Investing
First off, we want to teach you the basics of investing. Below, you’ll find some key terms and definitions to keep you in the know:1
- Stocks: Also known as shares or equity, stocks are the most common type of investment. They represent ownership in a specific company.
- Bonds: These are fixed-income investments where an investor loans money to a borrower for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
- Mutual Fund: This is a pool of money gathered from multiple investors to be invested in stocks, bonds, and other assets. This is managed by a professional, with each investor owning shares in the fund.
- Exchange-Traded Funds (ETFs): These are similar to mutual funds, but one would trade on a “basket” of assest like stocks, commodities, or bonds. Instead of buying each investment individually, you buy a share of the basket. This way, with a single purchase, you’re investing in a wide range of assets.
- Portfolio: All investment assets you own make up your portfolio. This includes things like stocks, bonds, real estate, and more.
- Dividends: Dividends are a portion of a company’s earnings that is paid to shareholders, usually on a quarterly basis, but it is sometimes paid monthly or yearly. Not all companies pay dividends, and those that do can increase, decrease, or eliminate them at any time.
- Capital Gains: In the world of investing, if you buy something (like stocks or real estate) and then sell it later for more than you paid, the extra money you make is called a capital gain. It’s basically the profit you earn from selling something for more than its purchase price. These profits are subject to tax.
- Market Capitilization: This is the market value of a company’s total outstanding shares. You calculate this by multiplying a company’s total outstanding shares by the current market price of one share.
- Volatility: This refers to how much and how quickly the price of an investment (like a stock, bond, or commodity) goes up and down over time. If the price moves up and down quickly and by large amounts, we say it has high volatility. This means it’s more unpredictable. If the price moves slowly and only by small amounts, it has low volatility, making it more stable and predictable.
- Yield: This is the money you earn from an investment, usually shown as a percentage. It’s like the income you get, often from interest on bonds or dividends from stocks. If you have a bond or a savings account that you invested $100 in, and it pays you $5 over a year, your yield is $5 or 5% of your investment. It’s a way of measuring how much cash (or income) your investment is generating compared to the amount of money you put in, showing you the return on your investment.
- Liquidity: Liquidity refers to how quickly an investment can be sold in the market without affecting its price. Cash is considered the most liquid asset, while assets like real estate are more illiquid.
- Risk vs. Reward: Risk means that you might lose some or all of your money. Reward is the gain you expect to get from your investment. Investments that are riskier tend to lead to higher rewards if they do well. But, there’s also a higher chance you could lose money! Safer investments usually offer lower returns, meaning you won’t earn as much, but there’s less chance of losing money.
Types of Investments
It’s important to know the different types of investments there are if you’re going to get into the world of investing. Some were already mentioned above, like:
- Stocks
- Bonds
- Mutual Funds
- Exchange-Traded Funds (ETFs)
Here are a few more types of investments you might need to know:
- Real Estate: This involves investing in property, whether residential or commercial. You can either buy physical property or invest through real estate investment trusts (REITs).
- Commodities: These are physical goods like gold, oil, and agricultural products. Investors can buy physical commodities, futures contracts, or commodity-related stocks.
- Cryptocurrencies: Digital or virtual currencies that use cryptography for security, with the most well-known being Bitcoin. Although there is a potential for high returns, cryptocurrency is subject to regulatory, market, and security risks.
- Cash & Cash Equivalents: Includes savings accounts, certificates of deposit (CDs), and money market funds. These are typically low-risk, low-return.
- Derivatives: These are investments that get their value from something else, like stocks, bonds, or commodities. This group includes things like options, futures, and swaps.
How to Start Investing
Now that you know a bit about investing, let’s dive into how you can invest! First, let’s look at a few different types of investment accounts:
- Brokerage Accounts: This is the most common type of investment account. It allows you to buy and sell stocks, bonds, mutual funds, ETFs, and other securities. They come in two flavors: taxable and tax-advantaged (such as IRAs). With a brokerage account, you have the freedom to manage your investments as you see fit.
- Retirement Accounts: These accounts help you save for retirement with tax advantages! There are two types of retirement accounts:
–IRA (Individual Retirement Account): Offers tax benefits, with traditional IRAs providing tax-deductible contributions and Roth IRAs offering tax-free withdrawals in retirement.
–401(k) and 403(b): These are employer-sponsored retirement plans. Contributions are made directly from your salary, and many employers will match your contributions!
You’ll also want to pick the right kind of financial advisor for you. There are two main kinds:
- Robo-Advisor: These advisors are completely automated, using algorithms to manage your investments based on your risk tolerance and goals. They typically invest in a diversified portfolio of ETFs and offer lower fees than traditional advisors where they are automated.
- Traditional Advisor: unlike their robo-advisor counterparts, traditional advisors are real humans who manage your investment accounts for you. They offer a personalized touch by offering financial advice and guidance based on your personal needs and goals.
Before you throw down any money into the investing ring, it’s important to know what your financial goals are. Whether it’s retirement, buying a home, funding education, or another goal, knowing what you want will help you choose the right investment strategy.
Next, you’ll want to assess your risk tolerance. Are you okay with having investments that are high-risk, high-reward, or do you want to play it safe with something low-risk? Younger investors might take more risk with the potential for higher returns, while those closer to retirement may choose something low-risk.
Creating an emergency fund is also crucial before you start investing. Having 3-6 months of expenses saved up will ensure you don’t have to dip into your investment income if unexpected financial situations come up.
Starting Your Path to Financial Growth
Whether you’re intrigued by stocks, the stability of bonds, the diversity of mutual funds, or the new world of cryptocurrencies, there’s a place for you in the investment universe. Remember, investing isn’t a sprint–it’s a marathon! With patience, diligence, and a willingness to continue learning, you’ll see that investing can transform your financial dreams into reality. So, why wait? The best time to start investing was yesterday, but the next best time is now. Welcome to the exciting journey of making your money work for you–happy investing!
Resources
1 https://smartasset.com/investing/investment-terms-you-need-to-know