Investing 101

Investing your money is a great way to make your money work for you. But how do you start investing in the stock market? Where do you begin? Don’t you already have to be rich to invest? Are you risking losing it all? The answers to these questions are simpler than you think. In this investing 101 guide, you’ll gain some useful investing insight.

This guide to investing for beginners will teach you the basics of making your money work for you. With the right investments, you can then focus your time on other efforts. And putting money into real property or commodities can be solid investments. Although, we’re focusing on investing in stocks today. Because over the long-term and on average, stocks provide some of the highest returns.

Investing 101: Buying Stocks

On average, stocks return roughly 8-10% annual over the long-run. This is higher than other asset classes such as bonds. And over the years, those annual returns compound. To see the power of compounding your savings, check out how your portfolio can grow with this free investment calculator.

Although, it’s important to know that stocks can be volatile. By that, I mean stocks can see big price swings in any given year. Some years will be up and some will be down. So, if you have savings that you’ll need to use in the next year – or even few years – it might not be the best to invest that in stocks. For example, if you’ll need it for a home down payment. But if you can play the long game – like saving for retirement – stocks can be a great way to go.

On top of that, the playing field has never been more accessible. Thanks to technology, almost anyone can invest in stocks today. This is a key point to our investing 101 guide. You don’t need to start with a huge lump sum to invest and trading fees have never been lower. You can easily start investing with less than $100 today. And everyone has to start somewhere…

How Do You Start Investing?

There are lots of free brokerages to start trading stocks. For example, Charles Schwab is a great online broker. Robinhood has gained a lot of popularity as well. And here’s a list of more online brokerages.

Through their apps or websites, you can set up free trading accounts. And to do that, it’s similar steps to setting up a bank account…

A brokerage will need to collect some of your personal info to make sure you’re real. This helps with keeping your account safe and is important for reporting taxes. If you realize some big investment returns in any given year, you’ll likely have to pay some capital gains tax.

Overall, setting up an investment account is easy. What holds most people back is just doing it. And once you’ve set up an account, you can connect your bank to send money. In most cases, it’s the same process of transferring money between accounts at different banks.

Once you’ve funded your brokerage account, you can then pick stocks or funds to invest in. Each brokerage has a different platform but the mechanics are similar. Just track down what you want to invest in, the amount you want to buy and then submit an order. Placing your first few trades can always be a little nerve racking but it’s the best way to learn. And starting small can be a good way to go.

Most large brokerages also offer customer support. They can help you understand and navigate their apps and websites. By taking and repeating these steps, you can continue to learn and improve your understanding of investing.

To help expedite the learning process, let’s look at some key investing terms…

Basic Investing Terms and Definitions

  • Investing: Investing is different from saving money. When you save, you’re amassing money, but there may be little to no interest. Investing can yield more income over a long-term period.
  • Stocks: You probably know what the stock market is in theory. The full definition is the exchange of public ownership of shares (stocks) of a company by buyers and sellers. It offers businesses an opportunity to expand by raising more money. It allows investors to earn money that they’ve exchanged for partial ownership of a company. Though the stock market is more volatile than other investment opportunities (making it possible to lose money), it also offers more reward potential.
  • Exchange-traded funds (ETFs): For some built-in diversification, you can use exchange-traded funds. These can be a low-cost way to access many stocks and various strategies. Our ETF Expert Nicholas Vardy covers these strategies in more detail.
  • Bonds: Bonds are individual loans made to investors, whether by businesses or the government. These tend to carry a much lower risk than stocks but also offer lower interest rates and usually fixed terms (meaning lower upside potential than stocks). Bond maturation rates also depend on the type of bond and can vary greatly – from a few months to more than a decade in some cases.
  • Commodities: Commodities are basic goods used in commerce, which are exchanged for other similar goods. Commodity speculators bank on the good’s price changing to make a profit.
  • Mutual funds: A portfolio manager manages a mutual fund – a pool of money investors contribute to. Portfolio managers then decide where the money would be best invested. Since the manager will invest in a wide variety of stocks, bonds and commodities, these funds are lower risk than investing in one or two stocks.

You can also access our free investing glossary that has many more financial terms.

Investing 101 Tips and Tricks

  • Start small: It’s okay if you don’t have a lot of money to start with – although some financial institutions will require a minimum initial deposit. Compare institutions and decide which one is right for you. Full-service brokers – who not only manage your funds but also provide investment and retirement advice – will naturally take bigger fees and commissions than online brokers. They also often require much bigger accounts. Some expect an initial minimum of $25,000 in assets.
  • Do your research: There’s a wealth of investment information available. You can compare things like minimum initial deposits, as well as what kinds of fees and commissions you can expect to pay. If you’re investing through employer retirement accounts, request as much literature as you can to understand your options. You should also research anything you invest in, from tech companies to hotel chains. And, if all else fails, ask an expert.
  • Be consistent: Yes, your money should grow in a well-managed investment account, but if you really want to maximize your profits, you need to consistently invest more into the fund. Decide how much you can contribute and how often – monthly, quarterly or yearly – and stick to it. Just as it’s okay to start small, it’s okay to make small contributions… as long as you’re making them. Even if you’re on a tight budget, try investing 1% of what you make per year into your stocks.
  • Automate it: Don’t start in the stock market expecting to play the field like a seasoned broker… Your best bet is to pick something that’s low risk through a professional manager or broker who will do most of the work for you. Or you can invest your money yourself, which will require more research but save you fees and commissions. Stay informed and ask questions, but don’t fall into the constant “buy, panic, sell” trap. The goal is to “set it and forget it.”
  • Diversify: Investing in different places, different types of stocks and types of funds can lower risk. In short, if you invest everything in one place, you run the risk of losing everything in one fell swoop should the company go under.
  • Think long term: Investing isn’t a get-rich-quick scheme… usually. There will always be the folks who strike it rich, like those who bought Apple or Microsoft early. But in general, you want to keep your money invested. The longer, the better. Ideally, you should think of your stock investments as “untouchable,” so you’re not tempted to withdraw funds unless it’s a true emergency. You’ll also limit the fees involved when you leave your money alone.

Think of a diverse stock portfolio like an insurance policy for your future. You can also beat inflation with stocks. That’s opposed to losing purchasing power by just holding cash. And you have the potential to earn far higher returns on top of that.

With careful research, expert advice and consistent contributions, the stock market can be a hugely effective vehicle for retirement savings. And with that, you’ve now completed investing 101 guide. Although, there’s a lot more to learn and many investment opportunities to consider…

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