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 have to already be rich to invest in the stock market? Are you risking losing it all? The answers are simpler than you think. Welcome to investing 101 at Investment U!
This guide to investing for beginners will teach you the basics of making your money work while you’re busy with the rest of your life. And although putting money into real property or a business constitutes an investment too, here we’re talking about the stock market.
Investing 101: Investing Is Essential for Financial Growth
Stock market investments pay about 19,700% more interest (over the long term) than if you left that same money in your checking account. Even better? You don’t need to start with a huge lump sum. Investing even an initial hundred bucks will put you on the road to financial comfort.
But why is investing in the stock market so important?
In a word… inflation. The $100 you save today is simply not going to have the same purchasing power when you’re ready to retire, especially if you’re 30 years away from that goal. For example, $100 in 1965 would be worth only $13.76 in 2019. And your savings account’s interest rate typically isn’t on par with the rate of inflation. But if you invest wisely, you stand to keep up, at minimum, and earn even more.
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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.
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’ll be more likely to beat inflation with stocks than a savings account, and you have the potential to earn far more profit 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!