Introduction To Investing For Beginners ( If You Know Nothing, Start Here)
Most of you might have heard that investing is one of the best ways to make your money work for you. The best part of investing is that it can turn even a modest amount of saving into a considerably good bank balance and it's all because of the power of the compound interest.
But the prospect of investing in the stock market can be very intimidating if you are just a beginner. There will be hundreds of questions and doubts in your mind like what kind of account should I get started with, what does "buying stocks" means, how to choose the stocks for buying etc.
First thing first, let's understand a little bit about what is investing really and learn some basic jargon of the investment universe.
What is investing really?
Investing is a way to grow your wealth by purchasing assets right now that you believe will grow in value and yield a profit for you in the future. There are so many different ways to invest your wealth, for example, buying real estate properties with the intention of selling them later to yield profit. But in this post, our primary focus will be on stock market investments.
A quick guide to some basic jargons
Every sector of the world has its own set of jargon and in order to learn more about that sector, one needs to be familiar with the jargon of that sector, and investment is no different.
We know that it's a little difficult to feel confident about investing money on mutual funds, stocks, etc when you are not even sure what the meaning of those words. Don't worry nobody is perfect from the word go, it takes some time to learn and you will also learn with the time. In the meantime, here are some basic jargons you should know :
An investor's investment portfolio is the collection of all the investments made and kept by the investor.
Mutual funds are collections of stocks, bonds, and other types of investment assets, like real estate properties, which are created and managed by financial professionals. The interesting thing about mutual funds is that it allows investors to invest in a diverse segment of the market without doing all the research to evaluate each stock themselves.
The stock market is an abstract space where investors sell and buy investments. Investors can buy and sell different types of assets or investments in the stock market.
Stocks are small components of asset ownership of a company. Stockholders yield a profit when the company perform well and grows in term of value. Usually, stocks are considered a relatively high-risk investment but can also yield a high profit if things go well.
Exchange-Traded Funds (ETFs) and Index Funds
These funds are similar to mutual funds as they also have a group of different assets, but they are not usually managed by a human being. Instead, index funds are created using a particular market index like the Dow or S&P 500. A market index is a collection of stocks that are used to measure the performance of an area of the market.
Exchange-traded funds are usually the collections of companies that share industries, geographical locations, or market capitalization i.e, the total amount of the shares of the company available on the market.
They are traded throughout the day on the exchange, which makes them a good option for people who are interested in playing an active role in their portfolios.
Bonds are actually debts owed by the companies or, usually, governments. When investors purchase a bond, they are essentially lending their money to the bond issuer. Bonds are also known as fixed-income assets, as bonds are repaid after a fixed time and at fixed rates, thus considered a reliable stream of investment return. But bonds don't have the astronomical growth potential that stocks do.
Now that you have some more understanding of basic investment terms, let's jump-start to doing some investment.
How to start investing
The journey to starting investment will depend on your personal financial aims plus the amount of money you can manage to put in your portfolio. If you don't have a decent amount of money, no problem, there are various ways to start investing. You can start with the initial investment of $150 or less.
ETFs, Investment apps and other automatic contributions
There are many investment apps in the market that make it easier for you to start investing with a very little amount for example Stash, Acorns, etc. You can start with them with as little as $5. They also offer selected ETFs to diversify your investment.
With apps like Acorns, you can start small and save up changes over a period of time with the help of its round-up feature. It means that if you spend $9.35 at a store, the remaining $.65 will be added to your Acorns account. This amount will be invested by the app for you. On the other hand apps like Stash, you can select investments from professional fund managers and lets you choose where you want to invest.
All you need to do is to choose from a group of portfolios that are of your interest.
Saving for retirement
One of the most common goals among many investors is to save for retirement. If you are one of them, then there are various ways for you to invest. One of the prime examples is 401(k) or provident fund. If your employer offers a 401(k) or provident fund, contributing a portion of your income to that retirement account is a nice way to start investing and if your benefits package includes an employer match, then it's the icing on the cake.
Different investment accounts
There are other ways to start a retirement plan like the IRA or Roth IRA. These types of investment accounts are made specifically for retirement which is governed by tax incentives and special rules. The contribution to IRA is taken pretax and taxed on withdrawal but Roth IRA is taxed now but grows tax-free.
IRAs are available via a different range of financial companies that vary from banks to brokerage firms. In a few cases, financial companies may also offer brokerage account but with different rules and regulations. A brokerage account allows access to a trading portal where you can purchase stocks, bonds, and create your own portfolio.
Know some basic investment strategies before starting
Every kind of investment involves some kind of risk, so it's important to strategize and understand how to mitigate those risks in advance. Here are a few things you need to keep in mind before you jump into the world of investment :
Do your research before investing
It doesn't matter what kind of investment you are interested in making, researching about the investment, tracking historical data, and current affairs related to it is very important. Remember no investment is 100 percent success, so it's better to invest your money on the assets where you have some good reasons and evidence to buy or sell.
Don't panic when market gets rough
Remember investing is a long term process and market changes every day, so don't be tempted to take your money out of the market as soon as you hear some negative headline.
The overall growth curve of market is historically positive even after taking recessions into consideration. Therefore be proactive but don't panic.
Don't burden yourself with overcommitment
Lastly, one of the most important investment strategies is diversification. Diversification means buying a wide variation of assets, including various types of holdings and issuers.
Diversification is very important, as there is an old saying "Don't put all your eggs in one basket". So with diversification you can improve margin of error in case of market value crash. Diversification is one of the reasons mutual funds, index funds, and ETFs are so popular among new investors.
But sometimes these funds come with an additional cost, especially mutual funds. Hence it's very important to understand the depth of your pocket and make a purchasing decision according to your financial conditions.
We hope after reading this post, you will be inspired to start your journey as an individual investor. Just remember, don’t let the fear of making mistakes keep you from getting started. The most important thing is to get started rather than getting it right on the first go.
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