Introduction to Investing
Even if you’re a total beginner, investing doesn’t need to feel intimidating. There are products and services suited to those on different budgets, whether you have several dollars or thousands of dollars to invest. Plenty of free and paid resources are available to help you discern whether you’re ready to invest and what types of financial products best suit your needs.
What is Investing?
Investing is the purchase of assets. The goal is for these assets to increase in value and to provide financial returns. Investors want to increase their capital gains, or the return on their investment. Ideally, you purchase an asset — like a stock or a bond — at a lower price and sell it for a higher price down the line. Investors can also purchase physical assets like gold and sell it for a higher amount when its value goes up.
Other ways investors can earn money is through receiving regular payments from assets they’ve purchased. For example, an investor can purchase stocks with the aim of it earning dividends, or regular payments because they’re shareholders. Or, someone purchases a real estate property to earn income from rent payments.
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A reputable financial advisor can work with you to understand your goals and offer recommendations on what to choose. This person can even help you manage your investments.
Types of Investments
Although not exhaustive, some types of assets you can invest in include stocks, bonds, mutual funds, and real estate.
Stocks
Stocks are essentially shares of a company, and you have partial ownership when you purchase one. Some allow you to earn potential returns through capital gains or by paying out dividends. The stock’s value will depend on how well the company fares, and some have more ups and downs than others.
Bonds
When you invest in a bond, you are lending a company or government money for a predetermined amount of time. You’ll receive a fixed rate of return in addition to the money you lent. Bonds are usually less risky compared to stocks but you may not get as high of a return. That being said, some bonds can be risky, especially those from companies that may be at a higher risk of default.
Mutual Funds and ETFs
Both mutual funds and ETFs invest in a number of stocks, bonds, and commodities. Think of it as a basket full of different assets where you own partial shares of assets. The main draw of mutual funds and ETFs is for investors to own hundreds of assets to help diversify their investments. Instead of purchasing a share of one stock, you can spread out your money to multiple ones. There are a variety of mutual funds and ETFs, including ones based on when you’ll retire, certain industries, and your risk tolerance level.
The main difference between ETFs and mutual funds are in how they’re operated. Mutual funds are usually managed by an investment professional, whereas ETFs are more passive (it tries to copy a market index like the S&P 500). As such, fees for mutual funds may be higher than ETFs.
Commodities
Commodities are physical assets like precious metals and raw materials like wheat. You can invest by holding the physical assets itself, or by purchasing stocks, bonds, and funds of these types of assets.
Real Estate
There are different ways to invest in real estate, such as renting out a home, flipping a house, lending money to real estate investors or by buying shares of a REIT (real estate investment trust). An REIT works like a stock in that it aims to generate returns for its shareholders, and can pay dividends.
What to Consider Before Investing
Investing is a great tool to help you build wealth and reach financial goals like having enough for retirement. However, not everyone is ready to invest.
Before opening an investment account, consider your current financial situation. Can you comfortably afford your expenses, including money you need to pay towards debt? If not, you may want to hold off on your goal for now. While investing is a worthwhile financial goal, it’s not worth sacrificing your current situation.
Think of it as laying a solid foundation: you want to be able to handle current and short-term financial obligations. For example, if you start investing as a beginner but don’t have emergency savings, you could be at risk if you lose your job. Sure, you can withdraw your investment funds, but the money you invested could have gone down in value or there could be fees with early withdrawal.
There are options that only require a few dollars to start for those who still want to invest. Some may even round up your debit card purchases and the difference goes towards an investment account.
How to Start Investing
Here are some tips on how you can start investing:
- Decide how much money you have to invest: The amount of money you have may decide the types of accounts you can open. Some brokerages, for example, may not have a minimum amount to open an account, but may have one to invest in certain assets.
- Research the type of assets you want to invest: Think about your goals and how long you plan on holding onto your investments before making withdrawals or selling them. Plus, think about whether you’re fine with taking on more risk to potentially receive higher returns or you prefer a more “stable” type of investment.
- Compare brokerage and management fees: Brokerage companies offer different types of assets so look to see which ones offer investment options you want. Be sure to look at any management fees you may be paying, as that can eat into your investment returns.
- Consider whether you want hands-on help: Robo-advisors are a great way to get some help without having to pay a financial advisor. Or, if you’re willing to spend the time researching and reviewing your investment plan, you can take the do-it-yourself (DIY) approach.
- Find a way to regularly invest: No matter the amount of money you have to spare, consider investing regularly so you can take advantage of time in the market.
Deciding Whether to DIY or Work With a Financial Advisor
Taking charge of your investing efforts yourself or working with a financial advisor are both fine options to pursue. Those who prefer a more hands-in approach may benefit from learning themselves and understanding where to best park their cash. Many brokerage companies offer online resources to help you figure out tactics from opening an account to what types of funds to pick.
If you have a bit more money and want to be more hands-off in your approach, or believe you’ll benefit from some professional guidance, a financial advisor can tick off those boxes. A reputable financial advisor can work with you to understand your goals and offer recommendations on what to choose. This person can even help you manage your investments.
