Investing for Beginners
Posted By Ziga Breznik, Last updated: March 7, 2020
Investing is an act of putting your money into something while expecting a return on your investment. You can invest in a financial asset, company share, a bank account. Any kind of undertaking that includes a potential profit is included. You will learn all about the basic guide of investing for beginners below.
If you are wondering if you should invest your money, you are thinking in a right direction. For example, investing your money in stock shares gives you an average return of 9 %. Compounding those interests over a period of 40 years would multiply your initial investment by a factor of 31. You can do a basic calculation here.
Investing adds value to your assets and is a source of passive income, meaning you don’t have to put any extra effort in order to gain value, once the money is invested. It is a good way of meeting your financial aims, such as affording a new home or getting some financial safety for your retirement.
If you do decide to invest your money, it is important to gain some knowledge on this subject. This article will point out some of the basic things you should know when putting your money into an endeavor.
The idea behind investing is mostly about working smart instead of hard. Many people work hard at their day jobs already. Putting your money somewhere where it grows is a smart way to make the most out of what you earn, so make sure you check out our beginner investing tips below. Contrary to spending, investing prioritizes your future prosperity before your everyday pleasures. You invest your money, so the money brings you value. It is a way better proposition than getting the value off of your hard work.
You should also understand, that investing doesn’t always end up in profit. There are many different types of investments. Usually, a better return on your investment coincides with a greater risk of your funds decreasing in value. You should always choose a type of investment which includes a risk that is acceptable to you.
Personal goals when investing
You should ask yourself a couple of questions when you are defining your investing goals.
How much money do you want to save? What are you saving your money for? By when do you think you will need your money? What is a level of risk you are prepared to take?
Risk tolerance describes the level of risk u are prepared to take when investing. You should always know that there is a chance that your investment goes in a different direction than expected. You could even lose all of your money.
If you are a younger person, you will probably be more willing to take higher risks, and the time when you want to take out your money could be further in the future compared to someone who is a bit older, managing their retirement funds. Being aware of the risk that is acceptable to you will make your losses manageable and you won’t stress out as much when monitoring your investment. Diversifying your investment is also a good way to disperse and lower your risk. When having your money in a few different places you protect yourself from a potential loss. Losing a lot of money in one investment vehicle does not hurt you as much when you have your money distributed across different investing options.
Timeframe and trading frequency
The timeframe in which you will need your money will help you choose the type of investment with appropriate returns, so there will be a better possibility to meet those goals and use your money in a way you intended.
It is also a good idea to consider your trading frequency. Are going to invest and forget about your money, or do you want to trade regularly? There is nothing wrong with regular trading if you are a professional. If you are a regular investor, trading is usually not a good idea. The majority of inexperienced traders will lose their money when trading. If you want to improve your trading skills without risking your own money, you can use the »paper trading« technique. When paper trading you just write down your trades without actually doing them. Using this method can help you learn and improve your trading skills without actually risking your funds.
Some types of investments require better knowledge and commitment than others. Your investments should always be based on your eagerness to commit time to researching and monitoring your investment. If your time is limited you could be investing in a mutual fund or an ETF. In that way, you will have your money managed by a professional while having a diversified portfolio. You should be aware of what you do and do not know. A good investor will never invest in something he doesn’t understand.
A good way to improve your knowledge is to reach out to experts in the field you want to improve in. Observing the mistakes and achievements of others is a great way to improve your methods. When following an expert you shouldn’t blindly trust him either. You can use someones knowledge and guidance but in the end, you should always do your own research as investing your money is always your responsibility.
Types of investments
There are different kinds of investment opportunities. Every investment type has its advantages and disadvantages. Knowing how different investment vehicles operate is crucial to your success when investing your money. Understanding some basic principles will help you make better decisions and choose the type of investment that is suitable for you and your financial situation.
Investing In Stocks
A stock is a type of security that guarantees a partial ownership of a corporation. It is a general term, used for describing the owner’s involvement in a company. Furthermore, a term share is used when dealing with a particular investment in a company. Having a share in a company means that you are a shareholder.
Owning a stock gives an investor the chance to take part in the company’s accomplishments through the change in the stock’s price and dividends declared by that company. In case of a liquidation of the company’s assets, the shareholders have a right to claim the assets in proportion to their shares. However, they do not own those assets.
Common stock owners have the right to vote at shareholders meetings and the option of receiving dividends if they are declared. Owners of preferred stock do not have any voting rights, however, they do get preference when paying out the dividends over the common shareholders (quick guide). They also get a favorable claim over the company’s assets compared to common stock owners.
Investing In Bonds
Bonds are a security vehicle through which an investor loans his money to the issuer. They are usually issued by companies or government entities when they need the funds for a new project or to cover existing costs. Instead of borrowing money from the bank, those entities borrow the money straight from the investors by issuing those instruments. They can also be bought on a secondary market on an exchange or over-the-counter. When a bond is issued, it has typically a face value of 100 $ or 1000 $ with a semi-annual interest. The value of a bond changes based on a number of circumstances, the direction of interest rates being the most relevant one.
Investing In Mutual Funds
A mutual fund is an investment vehicle, containing a pool of investors money, used for different investments in securities, managed by an investment manager. It is common practice, to evaluate the fund at the end of the trading day. All of the transactions are completed after the market is closed. The earnings come in the form of interest, capital gains or dividend. A mutual fund can be passive by tracking stock or bond market indexes or it can be actively managed. Active management is ensured by the investment manager. Those types of funds are usually more expensive than passive mutual funds. The expenses are covered from the profits generated by the actively managed fund. In both cases, the fund can be sold for a profit or loss, like any other types of investment vehicles. Investing in a mutual fund is a good way to diversify your portfolio as an investor becomes the owner of all the underlying assets of the fund, proportionally to his own investment.
Investing In ETFs
Exchange-traded funds are similar to mutual funds. The main difference between them is the way they are valued. The ETFs are valued continually throughout the trading day. Mutual funds, on the other hand, are valued only at the end of each trading day.
There are many alternative ways to invest your money. Besides stocks, bonds or mutual funds, you can put your money to work by investing it in real estate, hedge funds, gold, private equity or cryptocurrencies. A popular way of investing in gold is through an gold IRA.
Real estate investments are made by buying a property directly. Hedge funds and private equity investments are usually limited to investors who meet the financial conditions such as net worth and personal income requirements. Hedge funds can invest in almost anything while the private equity means investing in a company in a private way. Cryptocurrencies are also emerging as an interesting type of alternative investments. They are known for their volatility, high risk, and profit potential.
When investing, you should always know yourself and your goals. Knowing your goals will help you pick the investment type that suits your financial abilities and risk tolerance. Considering your time frame and risk tolerance when defining your goals will help you significantly when choosing the right type of investment. While aiming for your investment goals you will be feeling relaxed if you invested in something you are comfortable with. Different types of investments and strategies suit different investors. Knowing yourself and your goals will, therefore, help you pick the right investment for you.