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So, you’re interested in making your own investments, but have no real idea about where to begin. That’s okay! There are millions of people who feel the same way, but what makes you different is that you are actually looking for information to help guide you towards making that big first step towards becoming an “investor.”
It might seem like an impossibly complex topic at first but investing can be made quite simple if you read the right sources and talk to the right people. When it comes down to it, everyone started somewhere and becoming a confident and knowledgeable investor is not nearly as difficult as some people would like you to believe. In fact, millions of brand-new investors have gotten involved in the stock market in the last year alone and that number continues to grow each day.
If you’re unsure about this whole “investing” thing, you’re not alone. By breaking down what feels like an overwhelming and complicated subject into small, digestible pieces, we can learn a great deal about the investing world, including what they are, what you can invest in, and a host of other essential information. There are few times that investing doesn’t make sense for most people and by arming yourself with the essential knowledge to make sound and thoughtful choices, you’ll be well on your way to investing with confidence.
What is Investing?
There’s an old saying that the rich don’t work for money, their money works for them. While that might not make a whole lot of sense on the surface, it speaks volumes to the power of the stock market and making strong investments. Simply put, investing is something you can do with extra, non-essential money so that it can ideally multiply and gain value for when you want or need. Think of it like putting away money right now so that you receive more of it in the future. By setting aside money in the present, you allow the market to “do its thing,” which has historically meant increases in value in the long-term.
Whether you’ve got an extra $10 or $1000 dollars a week or month to set aside for investing, any amount is good enough when you’re just starting out in the investment world. Any seasoned investor will tell you that the only mistake you can make in the amount you begin setting aside is if you set aside nothing at all. Whereas a traditional expenditure sees you part ways with your cash in exchange for a good or service, investing means that you have put that money aside with the hope that it will grow over time.
What Types of Things Can I invest in?
Like so many other things in life, the answer to the above question is going to depend on who you are, what your goals are, and ultimately the type of investing you are looking to do.
Generally speaking, there are three main types of commodities that make up the foundation of a solid investment portfolio.
Bonds
Bonds tend to be one of the more “boring” types of investments, not that there is anything wrong with that. Bonds are an extremely safe investment but also bring the lowest rate of return of the three major commodities that investors tend to spread most of their cash through. Purchasing a bond is equivalent to lending money to whoever is issuing the bond. The bond issuer can be the government or a municipality or from the United States Treasury. Investing in bonds can also bring several important tax breaks and advantages. Investing in bonds is the ultimate low risk, consistent reward scenario.
Stocks
The main event for most people. When you purchase stock in a company, you can think of this as equivalent to buying a portion of the company that is issuing that stock, which is also known as a share. Investors hope that the stocks they purchase will be in companies that do well because this correlates with an increase in their money over time. If a company does not do well, its stock will subsequently suffer and you stand at risk of losing some, or even all of your investment. Some of the factors that determine how much money a company’s shares will cost are its size, success, and how many shares the company has available to purchase.
Mutual Funds
These tend to be the most popular of the three commodities listed in this section for investors looking to multiply their money for when it’s time to retire or make a significant purchase down the road. The simplest way to think of a mutual fund is by thinking of them as a collection of stocks all in one basket. A mutual fund will contain several different stocks but provides the added benefit of only needing to pay one price. Essentially, you are paying one price for access to a collection of high performing and trusted stocks.
Now, this is most definitely not an exhaustive list of all the things that you or anyone else are able to invest in, but these three commodities are an essential part of a new portfolio and including a mix of these three is often all that is needed for most investors.
The Many Different Ways to Invest
There are several different ways that one can begin investing and many different ways to manage your own investment portfolio. Some like to take a very hand on and active approach to investing while many others choose to leave the day-to-day management to a trusted advisor. Let’s take a look at some of the most common ways that people choose to approach investing.
Finding A Broker
Brokers can either be found online or in person. Most of the online brokers today fall under what’re known as “discount brokers.” These brokers provide investors with all the tools necessary to make their own decisions and transaction, while keeping their fees relatively low due to the limited amount of personalization involved. Discount brokers typically allow for low minimum deposits and a straightforward set of instructions for making your first investments.
Brokers may also be considered “full-service,” and these brokers can be found either online or in person. These types of brokers offer comprehensive investment options that may include just about anything related to money. Examples would be retirement, healthcare, and all the usual brokerage services. Full-service brokers provide tailored financial advice and often deal with more high-end clients, charging greater fees as well. However, with greater fees comes a more hands on approach and a targeted investment strategy.
Investing with an Employer
Private employers often offer a 401(k) option to their employees or a 403(b) option if in the public sector. Both types are commonly offered as work-based retirement plans that will allow you to deduct the amount you’d like to invest from your paycheck before taxes are calculated. No amount is too small to begin with, either, with experts recommending that you try to put at least 1% of your paycheck in to start.
Roboadvisors
These types of advisors are exactly what the name seems to communicate: an automated advisor that uses algorithms to provide investment advice. Online brokerages that offer roboadvisement are able to keep their transaction costs low and still provide the necessary tools and information to help people make smart investment decisions. Roboadvisors have become particularly popular along with the growth of index investing, which is essentially when an investor purchases shares in the entire stock market to mimic its long-term path.
Diversification
Anyone with even a slight amount of knowledge of the investment world will tell you about the importance of diversifying your assets. In short, diversifying your assets means that your investments are shared across numerous types of assets so that a negative performance by one or two will have less of an impact on your portfolio. It’s extremely important to begin diversifying as soon as possible, although it will be more difficult to do so when you’re first beginning with a smaller sum of money. The more money you have in your investment portfolio generally points towards a need to ensure you are diversifying your investments to lower your risk.
The Bottom Line
If it feels like everyone around you is investing, that may just be true! However, it’s critical to only get involved after arming yourself with the necessary knowledge to invest responsibly. There is a lot of bad advice out there and if you’re not careful, you can wind up starting off on the wrong foot entirely. A critical first step towards successfully building a portfolio is finding an investment broker that is right for your situation and suits your needs. Your broker should assist you in determining your risk tolerance, your short- and long-term goals, and several other key details that make or break a successful portfolio.
If you’re more interested in just beginning to dabble in the investment world, there are numerous apps and websites that offer low minimum deposits and easy guidelines to start getting involved in the investment world. If you are looking to become a serious investor, however, finding a broker is essential to serious success in the investment world.
No matter your financial situation, level of knowledge, or your reason or investing, there are always options to help new investors learn the ropes and set themselves up for success.