Investing is a great way to build wealth and have your money work harder for you. But the tricky part of investing is getting started in the first place. Between brokerage accounts, ETFs, and money market funds, there are a lot of terms to understand and take into account.
Don’t worry, because with our investing tips for beginners are your fingertips, you’ll understand the finance world better than ever.
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What Is Investing?
Investing is the process of using your money to buy assets that are meant to increase in value over the coming years. This can mean buying stocks, buying bonds, buying real estate, or buying currency and precious metals.
These options are meant to be riskier than just putting your money into a savings account but offer much greater returns. The average good savings account will only offer around a 1% interest rate annually. Compared to the stock market and putting your money into an index fund, which normally has around a 6 to 7% return.
Investing in the stock market now is easier and less of a hassle than ever. Whereas back in the pre-internet age, you had to call or mail your requests to make account purchases and sales. Now, with the internet, you can quickly log into a website or app and decide if you want to buy or sell an asset.
There is also the benefit of much lower commission and maintenance fees compared to olden times. Companies like Robinhood and Vanguard have made it relatively easy to pick up your phone and make sure that you don’t incur huge fees from trading on their platform.
What Options Are There for Investing?
Investing is very broad and has a great number of different options. The most simple option available is the brokerage account. This brokerage account is a simple investing account that lets you pick stocks, ETFs, and bonds that you want to invest in.
A brokerage account is self-managed, so there will be no direction. You can always utilize the tools from free resources to start finding sectors and stocks that you want to invest in.
There are also retirement accounts. Retirement accounts can vary, as there is a Traditional IRA, Roth IRA, and 401(k).
A Traditional IRA is meant for those that do not have a 401(k) but still want to make pre-taxed investments. This money is taken directly from your gross pay every paycheck and deposited into a brokerage, where you can then let either a fund manager or yourself direct the account. You also have the option to reinvest any dividends or capital gains back into the market, only paying taxes when you decide to retire or withdraw the money.
A Roth IRA is similar to a Traditional IRA, but it does not offer the pre-taxed exemption. You must contribute post-taxed money into the account. There is also a limit on how much you can contribute to a single account, that limit being around $6,000.
A 401(k) is typically a company-sponsored account that allows for you to invest pre-taxed money, but also receive a match from the company itself. The percentage that the company matches can vary greatly. One company could match 100% of contributions, while another may only contribute 100% up to 5%.
How Much Should You Invest?
Learning how much to invest comes down to your risk versus reward tolerance. Everyone has one and it comes down to how you feel about investing in the first place. The higher the risk, the higher chance you have of making money, but also losing money.
When you’re just starting out, it is important to find a certain asset that you feel comfortable with, and let it sit with your money. Getting in the habit of letting the stock market make you money without you constantly checking results is a great way to not develop stock exchange anxiety. This arises when you see numbers starting to fall and you want to sell everything and get out.
Investing also comes down to age. If you’re in your 20s and want to start investing, you can start with a much lower amount and watch the money grow over the next 30 years. If you’re in your 50s and want to start investing, you should contribute as much as possible, as there is less time for the money to grow before you retire.
With the little to no fees that are within brokerage accounts these days, it is easy to start with a little money. If your company has a 401(k), start there and match to the highest percentage that they offer, that is within your means. This is easier money to let go, as it comes right out of the paycheck and is like it was never even there to begin with.
How Should You Invest?
You have multiple options to invest, whether it be stocks or real estate. Investing in stocks can also vary greatly, as you have individual stocks, ETFs, and preferred stocks.
Individual stocks and preferred stocks are relatively similar when purchasing from a company. Preferred just means that you receive a higher and more consistent dividend payout compared to those that own individual common stocks.
ETFs, which stands for exchange-traded funds, is considered a stock option that consists of multiple stocks. They are a fund that pools together money and lets a fund manager decide where to invest the money. ETFs will list what they are invested in, so this makes it easier to understand what type of sector you are investing in.
A great way to get started is to find a sector that you believe in. For instance, if you’re big into green and clean energy sources, there are sector ETFs that you can invest in. You even have international ETFs that focus on emerging markets like India and Brazil.
Real estate is another tried and trusted way to gain wealth. There are two ways to make money from investing in real estate. Either through appreciation and selling the house, or renting it out to others.
With appreciation, you are hoping that the land and household up and increases in value over time. If you buy a piece of land in a booming area, and that growth continues, you can look to make a serious profit. If the area takes a huge dip, you might find yourself upside down on the house.
With renting, you are more likely to make a steady income month to month. But you do have to hope that your rental is always filled so that you’re always making money. If you’re still paying off the mortgage and the house is empty, you’ll be stuck footing that bill, plus the other bill for your current household.
What Makes Stocks Different From Bonds?
Bonds can be considered a loan from a company to a debt holder. Essentially, you’re giving money to a company so that they increase either cash on hand, or use this to pay down other debts. You make money off of bond interest.
This is different from a stock, which is technically a piece of the company that you now own. You are technically allowed to help make decisions for the company, which is why companies like Apple will send out all shareholders a voting system to make decisions for the company.
Bonds accumulate interest over a set period of time. This time can be anywhere from a few months, to a decade. It all comes down to what the bond issuer is offering and if the company even needs bonds at the moment.
What Are Other Forms of Investing Beyond Stocks and Real Estate?
Beyond stocks and real estate, there are also the markets of precious metals, currency, and cryptocurrency. Each of these options is extremely volatile, so it is not recommended for beginners or the faint of heart.
Precious metals consist of gold, silver, platinum, and palladium. You can have the option to buy the precious metals outright, but people also have the option to buy into stocks that own and contain these metals.
Currency, more commonly referred to as Forex trading, is the process of trading one currency against another. This is a 24/5 market, so you’ll be following news in other parts of the world at 2 a.m sometimes. This is also not recommended for beginners.
Cryptocurrency is similar to Forex but does not have any downtime. Crypto is trading 24/7 and has the highest volatility of any market since it is still so new. There are times where a Bitcoin can start the day at $35,000, but then end the day at either $40,000 or $30,000.
Investing Tips for Beginners: Make Your Money Work for You
By using these investing tips for beginners, you can start to get your feet wet in the stock market. It is a great way to hold assets and have money saved away for when you need to retire. Just be sure to understand your risk to reward tolerance and only invest what you feel comfortable with.
If you want to learn more about personal finance, be sure to check out the rest of the blog. If you know someone that is interested in the stock market, be sure to share this article with them and have them contact us to start their financial wellness journey.