Investing for Beginners (Seriously, if You Know Nothing, Start Here)

If you’ve spent so much as 10 minutes reading a personal
finance blog — and clearly you have — chances are, you’ve
heard that investing is one of the best ways to put your money to
work for you.

The power of compound interest can turn even modest savings into
an appreciable nest egg over time. And best of all, it’s passive
income.

But if you’ve never put money into the stock market before,
the prospect can be overwhelming. What exactly does “buying
stocks” even mean? And what kind of account do you need to get
started?

What Is Investing, Anyway?

Investing is a way to build wealth by purchasing assets today
that you anticipate will grow in value, yielding a profit over
time.

There are many different ways to invest, including purchasing
tangible items (like real estate or fine art) with the intent of
selling them later. But in this post, we’re going to be focusing
primarily on stock market investments.

Investing for Beginners: A Quick Vocab Lesson A collage of financial information on computer screens.

One of the first things new investors come to realize is how
much lingo there is to know. It’s hard to feel confident about
spending your money on stocks, bonds or mutual funds when you’re
not even sure what any of those words mean!

The good news is, nobody knows what they’re talking about (or
which words to use) when they’re first getting started. Here’s
a quick vocabulary rundown.

Stocks

The stock market is what we call the abstract space where
investors buy and sell investments. There are many different types
of investments, or “assets,” you can buy and sell on the stock
market.

Stocks are shares, or small pieces of asset ownership, of a
company. Stockholders earn money when the company performs well and
increases in value — but they’re also vulnerable to losses if
things don’t go as well as hoped. Thus, stocks can be a
relatively high-risk investment.

Bonds

Bonds are another common type of stock market investment, but
they work differently than stocks do. Bonds are actually debts owed
by corporations or, more commonly, governments.

When you purchase a bond, you’re essentially lending your
money to the bond issuer. Bonds help investors earn money by
accruing interest — and because bond issuers are obligated to
repay their debts, they’re considered a safer investment than
stocks.

What’s more, bonds are repaid after a fixed amount of time and
at fixed rates (which is why they’re known as “fixed-income”
assets), making them a reliable source of investment return.
However, they don’t have the exponential growth potential that
stocks do.

Mutual Funds

Mutual funds are pre-built collections of stocks, bonds and
sometimes other types of investment assets, like real estate, which
are created and managed by financial professionals.

Investing in mutual funds allows individual investors to buy a
diverse segment of the market without doing all the research and
footwork to assess individual stocks themselves.

Index Funds and Exchange-Traded Funds (ETFs)

These funds are similar to mutual funds in that they include a
basket of different assets, but they’re not generally actively
managed by a live human being. Instead, index funds are created
based on a specific market index, like the S&P 500 or
the Dow.

A market index is a representative collection of stocks that are
used to track the performance of an area of the market.

Exchange-traded funds might be collections of companies that
share industries, geographical locations or market capitalization
— that is, the total dollar amount of the shares of the company
available on the market.

Unlike mutual funds, they’re also traded throughout the day on
the exchange, which may make them a better option for investors
looking to play a more active role in their portfolios.

Investment Portfolio

Your investment portfolio is the collection of all the
investments you make and keep, otherwise known as your
“holdings.” For example, you may have 12 shares of Corporation
X, 27 shares of Corporation Y and 17 shares of an ETF which
includes stocks, bonds and real estate.

Phew! It really is a word salad, huh? Now that you’ve got a
better handle on basic investing terms, let’s learn more about
doing some actual investing of your own.

How to Get Started With Investing

How best to get started investing will vary depending on your
personal financial goals, as well as the amount of money you can
afford to put toward your growing portfolio.

But if you don’t have a whole lot of extra cash lying around,
don’t worry; there are many ways into the world of investing,
even if your initial investment is only $100 (or less!).

Saving for Retirement

Aside from building wealth in general, one of the most common
investing goals is to save for retirement. If that goal’s
on your list, you’ve got lots of investment vehicles to choose
from.

For example, if your employer offers a 401(k), contributing part
of your wages to that company-sponsored retirement account is a way
to get started investing. And if your benefits package includes an
employer match, you’ll definitely want to take advantage of that
— it’s free money!

Depending on your plan, you may have just a few curated
investment options to choose from or access to a wide variety.
(Psst — we’ll talk more about some basic investment skills in a
second, so don’t hit that “buy” button just yet!)

Types of Investment Accounts

Even if you don’t have access to a 401(k), you can
open a
retirement plan like a traditional or
Roth
IRA — that is, individual
retirement account.

These are investment accounts designed specifically for
retirement, which are governed by special rules and tax incentives.
For instance, contributions to a traditional IRA are taken pretax
today, but they’re later taxed upon withdrawal; Roth IRA
contributions are taxed now but grow tax-free.

And in both cases, it’s not as simple as pulling your money
out whenever you want; except in specified circumstances, you’ll
need to wait until you reach age 59 1/2 to fully access that
money.

IRAs are available through a huge range of financial firms, from
nationwide banks like Chase to brokerage
firms like
TD Ameritrade
. Financial companies like these may also offer
brokerage accounts, which aren’t subject to the same special
rules and regulations as investment vehicles built specifically for
retirement.

A brokerage account allows you access to a trading interface
where you can purchase individual stocks, bonds or ETFs, creating
your own portfolio from scratch. But if you’re not feeling up to
DIYing your investments, you can also use a robo-advisor, like
Ellevest, which will
allocate your assets for you.

Apps, ETFs and Automatic Contributions A phone displays a money saving app.

Only have a few bucks to spare? Apps like Stash and Acorns
make it easier than ever to get started investing with as little as
$5,
and they offer curated ETFs to help you diversify your
holdings.

You can also set up regular, automatic contributions, which will
fuel your portfolio’s growth over time.

Basic Investing Strategies to Know Before You Go

Now that you’re versed in the lingo and you’ve got the
lowdown on a few accessible investment options, there are just a
few more things you need to know before you take the next step and
become an investor yourself.

Since all investments involve some risk,
it’s imperative to be prepared and informed on how to best
mitigate those risks ahead of time.

Don’t Overcommit

Perhaps the most important investment strategy is one you’ve
doubtless heard before: diversification. Diversifying your
portfolio means purchasing a wide range of assets, including
different types of holdings and different issuers.

Why is diversification so important? Well, it’s just like that
old saying about not putting all your eggs in one basket. If you
drop that over-laden basket and don’t have any other eggs in
reserve, you’re in a messy situation.

Similarly, when market values fall, your portfolio will
have a lot more margin for error if you’ve got a variety of
holdings.
If one of the companies you own stock in goes
under, for instance, you won’t be entirely sunk if you own shares
of other firms — and some government bonds, for good measure.

Diversification is one of the reasons mutual funds, index funds
and ETFs are so popular among new investors.

However, some of these funds do come at an additional cost —
particularly mutual funds, which are actively managed by a
financial professional. That’s why it’s important to check out
the expense ratios before making your purchase decision, especially
if you don’t have a lot of investment capital to work with.

Do Your Homework

No matter what types of investments you’re most interested in
owning or how you go about getting started, research the assets
you’re considering
, keeping both historical performance of
interest rates and current events in mind. You might even consider
hiring a financial advisor to help you make your decisions.

Although no investment is a sure thing, putting your money in
the market feels a lot less like a harebrained bet when you have
evidence and reason behind your choices. Investment advisors can
help you assess your risk tolerance and make more informed
investment decisions.

Keep Calm When the Market Gets Rough

And finally, keep in mind that investing is a long game,
and market fluctuations are an everyday reality. Although it can be
tempting to rip your money out of the market as soon as you see a
scary headline, if you diversify your holdings and sit tight
through the lean times, the market usually corrects itself.

Even taking major recessions into account, the market’s
overall growth curve is historically
positive
— and stashing your cash under the mattress (or even
in a traditional savings account) can’t come close to the
earnings you can glean through compound interest.

Good luck, new investor!

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Source: FS – All-News2-Economy
Investing for Beginners (Seriously, if You Know Nothing, Start Here)