The Complete Beginner’s Guide to Investing
Investing in Stocks for Beginners
Investing is an accessible wealth-building tool, and it’s available to anyone who’s willing to use it, regardless of the income level or current net worth. You see, the great thing about investing is that it gives you the opportunity to develop a portfolio just by putting away small amounts of money over time. The fact that it takes time before you see results from investing is really what sets it apart from an activity like gambling for example.
If you’re new to investing and want to find out more about what it’s all about and how you can use the technique of compounding to your advantage, then you’ve come to the right place. In this article, we’ll be sharing with you the fundamentals of investing, how the markets work and what you can do to get started!
What is Investing?
Ever heard the phrase “work smarter not harder”? Well, that’s what investing is essentially all about. In fact, investing is a great way for you to make sure that you get to enjoy all the fruits of your labor in the long run.
Of course, it’s easier to spend money than it is to save and invest it, and the first thing most people think about when they get paid is to spoil themselves with new clothes, spa sessions, etc. However, at some point, you have to think about the future and start to give your long-term goals priority over short-term gratification.
Whether, you’re investing with little money, you essentially create a safety net for yourself because you never know what might happen in life. Plus, investing your money means that you’ll be able to watch it grow and accumulate over time so that you can enjoy a super comfortable retirement.
The good news is that there are plenty of investment vehicles available for you to try out, from stock and bonds to real estate, ETFs, and mutual funds. Even entrepreneurship can be seen as an investment.
Of course, there are pros and cons to each investment vehicle that we’ve mentioned here, and it’s important that you understand the risks associated with each to get the most out of the one you end up choosing. For instance, if you choose to invest in a mutual fund, it’s important that you know who’s managing it, where they’re investing the funds, as well as the fees and expenses that come with it. It’s very important that you keep in mind that investment is essentially a risk and there are no guarantees, but with a bit of research and initiative on your part, there’s a lot that you can do to ensure success.
To help you along, we’re going to start by taking a look at how investing enables you to benefit from compound interest, which is really one of the greatest advantages of investing.
Investing for beginners
The easiest way to explain what compounding interest can do for you is to make an illustration of how it works. You see, with compounding interest, the earlier you start, the better.
For example, if you’re a 25-year-old that just started working, and you want to retire with a nest egg of $1 million by the age of 60, then you’d have to put away $880.21 every month in order to reach your goal, on condition that you get a 5% return on your investment of course.
On the other hand, if you’re starting a bit later at 35 years old, then you’d have to invest a total of $1,679.23 every month to reach the same goal.
Now, let’s say that you’re a real late bloomer, and you’re only starting your investment at the age of 45 years old. At this point, you’d have to put away $3,741.27 every month for you to have $1 million by the time you turn 60.
As you can see, the earlier you start, the less you have to put away, and you’ll have a really great head start on life in general.
When it comes to investment strategies, each one has its merits and will suit different types of investors. To find the best one for you, it’s important to consider your goals, your limitations and the time-frame within which you want to invest.
What do you want to accomplish with the funds that you’re putting away? Is it to have a safety net when you retire? Or is it to pay for your kids’ college tuition when the time comes?
Getting clear on your goals will help you figure out what your desired outcome is, and you might even decide to have two or three different investments to cater for different goals. The main important thing is to understand your “why,” keeping in mind that your goals should be accompanied by a clear timeline and you should understand the risks associated with the investment vehicle you choose.
One of the major risks associated with investing is that of completely losing your investment, or having your investment decrease in value.
This is an unavoidable reality for many investors because sometimes stocks just depreciate in value because of the financial crisis or what’s known as “market corrections,” like the great stock market decline of 2008 which saw a lot of people lose out on their investments due to unforeseen circumstances in the market.
That said, it’s important to be honest with yourself, especially when it comes to your own risk tolerance. How much market volatility are you willing to put up with? In most cases, your concern with your investment’s drop-in value is directly related to your age, as that determines the time at which you’ll be needing the money.
For example, someone in their 20’s or 30s won’t really care about how their retirement investment is performing because they won’t need the funds for some time to come. However, someone in their 60s will definitely care more about market fluctuations because they cannot afford to wait for their investment to recover in time for their retirement.
Ideally, your investment should mature around the time at which you’ll need it, especially because most of your investing goals are probably time sensitive.
For instance, a young couple that’s saving for their toddler’s college fund can afford to take a little more risk during those first few years of their child’s life, whereas a more conservative approach will be needed as their child gets older and goes into high school, for example.
How long do you plan on holding on to your investment for? If you’re like Warren Buffet, then you’ll most probably employ the “buy-and-hold” strategy, which is all about holding on to stock regardless of how the market is performing.
This is obviously a great strategy for long-term investment and means that you won’t have to spend much time reviewing your investment portfolio. On the other hand, there are people who buy and sell shares every day, which can be very time-consuming and is mostly suited for professional traders.
Also, you can try to find a good middle way between these two investment strategies, one that will enable you to get the most out of your investment when the time comes for you to cash in your chips.
Knowledge and Comfort
There are certain investment strategies that require a lot of time, planning, and constant monitoring, whereas others are very low-maintenance. Your best bet is to find an investment strategies or strategy that coincides with your comfort levels, and the amount of time you’re willing to invest in it.
Some great options include low-cost index funds which enable you to take advantage of a wide range of markets including domestic and foreign stocks, as well as bonds. On the other hand, you have target date mutual funds, which are professionally and carefully managed so that as you near retirement, the investment is slowly taken away from equities exposure.
For the seasoned and knowledgeable investor, then vehicles like real estate investments, individual stocks, and actively managed funds are all great options.
How Technology Has Changed Investing
Technology has become such an indelible part of the modern human experience that it only makes sense for it to affect the way in which we invest our money as well. Technology has certainly had a positive effect on investing because it has enabled a significant reduction in fees and has democratized the entire industry as well.
Buying and Selling Securities
Back in the old days, you’d have to place an order with a stockbroker to make a trade, and that meant paying high commission rates and pretty much twiddling your thumbs until your account statement came in through the mail to tell you how your investment is doing.
Nowadays, if you have the necessary know-how, then you can easily buy and sell stocks online by yourself or make comparisons between different firms to find the one with the lowest transaction fees.
The robo-advisor has to be one of the most innovative tech inventions of the last decade! Not only has it enabled major firms to simplify the management of client portfolios through the use of algorithms, but it has also made it possible to lower their rates as a result significantly.
Types of Investments
There are a lot of different investment options available to choose from. While some investors prefer ETFs, others choose to invest in real estate, businesses, closed-end mutual funds, individual stock, and bonds as well as mutual funds.
Once you buy a share of a company (i.e., stock) you’re able to benefit from that company’s success as its stock price increases, as well as through dividends. While stockholders don’t necessarily own the company’s assets outright, they’ll still be entitled to the company’s assets should it go through liquidation.
Common stockholders are entitled to receive dividends from the company whenever they are declared, and they can also participate in shareholder’s meetings using their voting rights.
How bonds work is that a bond issuer (usually as a company or government agency) gets a loan from you as the investor, and then pays you back the principal amount-plus interest on a periodic basis. The only problem here is that you can only get the principal amount back when the bond matures.
For example, a corporate bond worth $1,000 will most probably pay you a taxable, semi-annual interest, whereas the interest you receive from municipal bonds won’t get taxed. If you’re considering an investment in treasury bonds, then you can rest assured knowing that you won’t have to pay any federal tax on the interest either.
As the name suggests, a mutual fund combines funds from different investors and is managed by a single investment manager who puts the funds into vehicles like bonds, stocks, etc.
While some mutual funds can automatically track stock and bond indexes like the Barclay’s Aggregate Bond Index, or the S&P 500, others are actively overseen by a dedicated fund manager who deliberately picks out the fund’s investment vehicles. The latter option is obviously more costly, which means that as a shareholder, you’ll get less of a return on your investment than if your fund was run passively.
ETFs are day traded on the stock market in the same way that stock shares are traded, but at the same time, they’re quite similar to mutual funds because they can also track passive markets such as the Barclay’s Aggregate Bond Index and the S&P 500 among others.
However, ETFs are valued on a consistent basis throughout the day, whereas mutual funds are only valued at the trading day’s end.
Also, we’re seeing a growing presence of smart beta EFTs which are able to generate indexes based on momentum, low volatility, and quality among other elements.
Before you start investing, the most important thing to decide on is your investment goal. This could be anything from buying yourself a car, putting your kids through college, or enjoying a comfortable retirement. Once you’ve figured out what your investment goals are, you can then decide on the timeframe and risk tolerance for each.
It’s also a good idea to diversify your investment portfolio so that you don’t put all your eggs in one basket. This will enable you to develop a wide portfolio that provides a considerable balance between potential ROI and downside risk protection while staying aligned with your risk tolerance at the same time.