Investing is a key part of planning for your future. In this article, we’ll go over investing for beginners. You’ll learn why it’s so important to educate yourself on investing, how powerful it can be, and where to get started!
When most people think of investing, they think of the stock market. For some people, the stock market seems like a giant online casino. But this couldn’t be further from the truth. Everyone can benefit from the stock market as long as they take the time to learn about it!
I was always someone who preferred to save my money. I liked to have it in a bank account right where I could see it.
But when I learned about inflation and how important it is to save for retirement when you’re young, I started looking deeper into how to invest.
As I learned more about how investments work, I realized that I was actually taking the bigger risk, by leaving money in a bank account to sit idly by while the rest of the world moved forward and inflation carried on, making money less valuable everyday. I came to learn that not investing my money was actually riskier than investing it.
It’s true that there are definitely high-risk forms of investment and putting all your money into a single stock is a poor idea. However, low to moderate risk investments are much safer than hiding money away where it won’t work for you and will actually depreciate over time due to inflation.
Why Invest?
Let’s go over a few reasons why you should start investing.
- Inflation: The value of our money goes down by around 2-3% every year. The reasons for this are complicated, but most western economists agree that a low level of inflation is good for the economy so don’t expect this to change anytime soon. $100 today is worth $97-98 next year. What this means is that you must counteract the negative effects of inflation through investing and smart debt.
- Retirement: Investing your money today means you’ll have more of it saved up by the time you retire if you do it smartly.
- Future Planning: If you plan to buy a house or vacation home in the future, getting started on investing today can help you reach those financial goals sooner.
Types of Investments
Let’s talk about the different types of investments available.
There are several ways that you can invest. The most popular types of investments include stocks, bonds, mutual funds, and real estate investments.
Investing isn’t just for the rich or the finance experts. You don’t need thousands to start an investment account, either. There are so many options out there for beginner investors, and some allow you to open investment accounts with just $100.
Stocks
Stocks are the most straightforward type of investment. Stocks are essentially partial ownership stakes in companies. People buy stocks in publicly traded companies in hopes that the company will make more money in the future, and thus the stock will be worth more. The piece of stock you own in a company is called a share.
Owning individual stocks is considered risky because without in-depth, specialized research you don’t know whether the business will take off or sink. Pandemics, natural market forces, competition, or new regulation could all cripple a company overnight, rendering your stock virtually worthless. On the other hand, the company could receive a large contract, develop innovative technology, or gain market share, making your stock multiply in value.
For this reason, it’s best to spread your investment out over multiple stocks and the best way to do this is through the S&P 500. The S&P 500 is the measure of the top 500 stocks in the American stock market. You can invest in the S&P 500 through various funds and lower your risk. Historically, the S&P 500 has returned a 7% yearly to investors.
What does that mean in practice?
If you invest $100 in the S&P 500 this year, there’s a good chance that in one year, your stock (and therefore your money) will be worth $107. Don’t forget about inflation of course, so subtract 2 or 3%, and you’ve made yourself a profit of $4 or $5!
You can get started investing in stocks for free using new brokers like Robinhood and Public.com. Thanks to competition, traditional stock brokers now offer free trading too and you can sign up with Charles Schwab to start investing for free (no commissions!).
Bonds
Bonds are a second key investment time to know. When you purchase a bond, you’re lending money to an organization and receiving interest on the profit. Bonds have a lower risk than stocks, but there is still some risk involved. A company could go under, for example, and not be able to repay their debts to bond owners. Generally, however, bonds are considered less risky than stocks. You have less chance of making it big with bonds, but you also have less chance of losing a lot of money with bonds, when compared to stocks.
Mutual Funds
Many financial advisors recommend mutual funds to new investors because they are generally low risk, and yield a good return over time. Mutual funds take a group of investors’ money and diversify it among a portfolio of companies. Your money will be spread out among several companies and in the form of bonds, equities, and derivatives.
Exchange-Traded Funds
Exchange-traded funds or ETFs are like mutual funds, but they work within the stock market rather than bonds. If you’re interested in the stock market, but you don’t want to risk buying single stocks, ETFs would be the right place to invest your money. The stocks will go up and down throughout the day, and you will see gains and losses throughout the year, but if you keep your money in an ETF long term, you should see overall growth, especially if your portfolio is sufficiently diversified.
Retirement Plans
The last type of major investment to know about is retirement plans. While no one likes to think about retirement when they’re young, this couldn’t be a bigger mistake!
The main types of retirement plans are 401k and IRA. IRAs have two types: Traditional and Roth. With these plans, you can invest your money in a fund where it will work for you from now until retirement.
A 401k is a retirement plan sponsored by your employer and paid for by both the employee and the company.
Traditional IRAs are private retirement plans that allow contributions which will be taxed when they are withdrawn in the future when you retire. Contributions to this type of retirement plan are tax-deductible now since you will pay tax on the income in the future. Roth IRAs on the other hand, allow contributions from your income that has already been taxed. That means that when you withdraw it in the future, you won’t pay tax on it.
Most financial experts agree you should open a Roth IRA after you have contributed everything to your 401k that your employer will match. You don’t want to leave free money on the table, so when your employer will match your 401k contributions, it’s smart to take that offer and put in as much as your employer will match. While it’s up to you, a Roth IRA is generally recommended over a Traditional one as tax rates don’t seem to be slowing down and there is a good chance they will raise higher in the future.
How to Get Started
When I first started investing, I began by researching online investment opportunities. Since I’m a pretty busy person, I knew that I was not likely to find time to get away and meet with a financial advisor in person. If you’re someone who likes to talk to people and ask questions because you’re a little more skeptical of online services, you might want to contact a financial advisor.
Robo-advisors
Robo-advisors are one of the simplest ways to get started investing with little money. Robo-advisors use artificial intelligence to make investments according to your risk tolerance. They will start off by asking you a few questions about yourself. The system will want to know your age, your goals, and your aversion to risk. Afterwards, the system will generate a portfolio based on algorithms that are designed to meet your specific needs. You can adjust the portfolio manually or you can leave it as it is.
From there, you can set up regular transfers from your savings or checking account into your investment accounts. If you prefer a more hands-off approach, you can set up automatic withdrawals so that your investment account will withdraw a fixed amount from your account each month and apply it toward your investments.
Online Brokers
Another option is to manage your investments hands-on through online brokers. Thankfully, we no longer need to pay commissions fees for each trade we initiate. Thanks to the initiatives of trading companies like Robinhood, almost every major broker offers free stock trading online to their customers. I use TD Ameritrade and have been very happy with their system for managing my stock investments.
Financial Advisors
The internet has made it easier than ever to find local professionals. A simple online search of local financial advisors should produce some local financial managers for you to learn about. Often, there are reviews to read right there when you search the offices. If you don’t know anything about any of these financial offices, you can choose which ones to call based on the reviews.
Ask a Friend
So far, we’ve talked about all the ways that you can start investing on your own. Most of us, however, started investing because someone we know and trust talked to us about it. Do you know someone in your life who has clearly handled her money with excellence? Maybe you know a schoolteacher who somehow paid off her home on a tight budget, or maybe you know someone who is fascinated with the stock market and has been learning about it for years. Reach out to those people.
In my experience, people who have found success with investing and wealth management are thrilled when they can pass on their knowledge to someone who is interested in learning. It’s important to do your own research, of course, but there’s no reason to go it alone.
The journey toward financial freedom is more fulfilling when shared with like-minded friends and family. As in any area of expertise, there are always people out there who know more about investing than you do, so why not learn from them?