If you have decided to start investing, congratulations on some smart thinking. It is a great way to make extra money and set yourself up with a brighter future. As you have made the decision to invest, it is important you learn how to do it.
Devote a little of your time and take in the information included in this guide to help you get started.
There are many reasons to start thinking about investing, such as:
The list of reasons you have could differ, but essentially we want to invest to make money, regardless of how that money will be used.
Many people decide to save and will put money away in a checking or a savings account. While your money will grow in these accounts, it will not grow by a significant amount. Also, the difference between the two types of accounts is negligible if you take a close look at them.
By choosing to invest your money, your wealth could significantly improve. You are likely to see up to five times the amount that you would from a savings or checking account.
Investments in stock have a historical return on average of around 9 percent a year. So you can see that the difference is substantial. Savings and checking accounts usually average less than one percent interest per year.
If you are thinking about investing for your retirement nest egg, then it is usually suggested you save around 10-20 percent of your income. This can be a lot for some, so start off with what you can and increase it over time.
For example, if you are putting 4 percent into your 401(k) from your salary, invest a little on your own too. Start investing with around 6 percent and have it automatically transferred to a brokerage account.
That way, your investment will become a habit and you won’t make excuses not to do it when payday comes around. Even if you only start with $100 each month—over time this adds up.
You might end up pleasantly surprised at the impact a small investment could have on your financial future. This is especially true if you start out when you’re young and it has many years to grow. Another great piece of advice to be offered is to start as soon as possible.
There are many opportunities for investment and with each comes an element of risk. Choosing the right one is not always easy and somewhere along the way, you could lose a little money too.
This guide will concentrate on the most commons types of investment—the ones that are ideal for those just starting out in investment.
These are also referred to as equities. Basically, you are buying part ownership of a company or companies. If you invest in a company and it does well, the stock will increase in value.
If you own stocks in a company, you will receive a share of profits—and losses—that the company achieves. There are two types of companies or business you can invest in.
Privately Held Business
A private business has no shares held in the public market. It’s a great option for entrepreneurs. These can come with not only high risk, but also high reward.
It begins with an idea which you then start a business from. The business needs to be set up so that expenses are less than the revenue. It is grown over time and you reap rewards for your work.
You need to ensure capital is managed fairly to provide a good return which will exceed the amount you could make from a passive investment.
Publicly Traded Business
This is where a private business sells parts to outside investors. When a company decides to do this, it is known as an Initial Public Offering (IPO). This process allows anyone to become an owner of shares in the business.
There are different types of stock which you can own and the ones you choose will depend on your investment strategy.
- Blue-chip stocks.
- Dividend investing.
- Dividend growth and investment.
- Value investing.
If you have a more aggressive investment portfolio, you could head towards the route of investing in bad companies. With this type of investment, when even small profits are seen, it can give the companies a somewhat large jolt in the market. Stock prices sometimes see dramatic increases.
These are referred to as fixed-income investments. When you invest in bonds, you are basically loaning money to the issuer in exchange for interest-based income.
There are several ways to invest in bonds; some examples are:
- Certificate of deposit.
- Money markets.
- Corporate bonds.
- US savings bonds.
- Tax-free municipal bonds.
Like stocks, these are often purchased using a brokerage account. When you select your account, you will need to make the decision between a discount broker or full-service brokerage.
The minimum investment to open a brokerage account will vary, but is typically from $500 to $1000. For education and IRA accounts, this rate is often lower.
You could also opt to make your investments with the help of an asset management company which operates as a fiduciary. Or as an alternative, you could choose a registered investment adviser.
This is a familiar type of investment to most. With real estate, there are several ways in which to invest but typically it comes down to:
If you develop something, you will be selling it for a profit. If you buy something and rent it out then you will earn revenue from the payments.
Many who have invested wisely in real estate have found it leads to wealth. This is because there is far more leverage to be taken advantage of.
Given the right investment, with good terms and obtained at the best price, someone with a low net worth is quickly able to accrue resources. They would soon end up in control of a bigger base of assets that they could not afford otherwise.
One thing which new investors may not be aware of is that it is possible for real estate to be traded in the same way as stock. This would be done using a corporation authorized as a REIT (real estate investment trust).
As an example, you could choose to invest in the REIT of a hotel. You would make your revenue by collecting a share from guests checking into the hotels and resorts included in the company’s portfolio.
There are many types of REITs to choose from:
- Apartment complex
- Office buildings
- Storage units
- Senior housing
- Parking garages
People become scared of investments due to the risks they have to take. They are apprehensive about investing money in the stock market as it can be so volatile.
Those who are in pursuit of the highest returns are the ones that will invest heavily in stocks. During recessions, they will often experience big losses.
If you are averse to risk, you may choose to steer clear of stock markets or invest only little in them. This means returns will be lower and each year you could make less.
Your main strategy should be diversity. You ought to be investing in different areas of the economy. Build your portfolio to include a mixture of stocks and bonds and consider adding in some foreign holdings.
Your portfolio is a collection of all the investments you own. This includes any stocks and bonds, investment accounts, and your home.
The value of all your investments is what makes up your portfolio. You should ensure the portfolio is balanced and will meet the strategy you want for your investments.
It will also show you if your investments are diverse or if you need to make a few changes.
The amount of risk you take with your investment strategy should reflect the time frame which you have to invest. The choices you have to make are between high-risk, high-return and low-risk, low-return strategies.
The younger you are, the further away from retirement, so you are able to take more risk with your investments. If you are starting your investments in your twenties then it could be more beneficial to look for stock-heavy investing.
You can go after high returns and, if you make a loss during a recession, you still have the time to make up for them. By the time you retire, those losses will be insignificant.
On the other hand, if you are older and just building your portfolio, you should be looking to avoid such risks, and preserve your savings.
You could choose to put your investment into a target-date fund. This will make the investment decisions for you and adjust your investments accordingly.
So, the closer you get to retirement, the more it will protect your assets. Possibly shifting your money from stocks to bonds, so that there is less risk.
When it comes to investing, there are two core methods. These are active and passive.
This is where you choose to purchase individual stocks, bonds or mutual funds that are managed actively by professionals. As an active investor, your goal is to thrash the market.
Passive investing is where those managing the funds try to avoid fees and limited performances. The idea is to build the wealth gradually.
In order to decide which type of investment you want to choose, you need to ask yourself how much time you want to concentrate on it.
If you have more time to dedicate to the research of different stocks, then you should choose active. If you just want to put the money in and not the time, then go with passive.
There is nothing wrong with either; it is down to the individual which path to choose.
People think of safe investments as those that are not related to the stock markets. However, they don’t often think about inflation and the impact it can have on what they consider safe investments.
Someone who is averse to risk may decide to invest their money in a Certificate of Deposit. They may consider this to be a safe way of investing. If you buy a CD that is insured, it is true that you won’t lose your principal investment.
If you take inflation into consideration, though, it can be a different matter. If the rate of inflation is higher than the rate of interest the CD pays, this means you are losing money. So even an investment many consider to be safe still comes with risks.
The safest way to invest is to save more money than you need. That way, you can recover more easily from dips in the market and inflation rates.
Average investors are people like you and me. We are not out there trying to thrash the market with buying low and selling high. We don’t have the time for this. Our lives don’t allow us to obsess over watching the stock prices constantly.
The average investor is usually aiming to achieve average returns. The good news is that the market average traditionally stays at around seven to ten percent.
So that translates to whatever you invest in being seven times bigger than your starting investment. This is a pretty good figure.
As an average investor, you don’t have to put in too much work and it doesn’t cause huge amounts of stress. Plus, long-term, the returns are great.
It is much better to be an average investor and see a good return than to gamble all of your money and end up with nothing.
Being an average investor, you now know you can look forward to around seven percent return on your starting investment. Here are some great tips to help you become the best average investor.
1. Long-Term Thinking
As you are investing on a personal level, it is unlikely that a shift in price will have great impact. Unless something earth-shattering happens, it will balance itself out and you just need to be patient.
2. Only Invest What You Can Afford
If you needed to, you could sell your investments, but they are better off left to grow. This is why it is important to be realistic about what you can afford. You don’t want to end up having to sell your investments because you can’t cover expenses.
Try to make sure you keep enough to one side for expenses, including unexpected costs, then invest the rest.
3. Believe in What You Buy
It is too easy to listen to a friend or a relative and take up their advice. The same as when you hear about an opportunity for investment on the TV or radio.
If you don’t understand it or you don’t believe in it, then the rule is simple, don’t buy it. Follow what you believe in and have knowledge in.
Maybe you have an interest in something and are considering investing in it. You may know the product but aren’t sure if it’s profitable or innovative. The company could just be existing on this one product that may, over time, lose the interest of investors.
Research into the company to find out all you can about them, before investing.
5. Make the Investment Then Forget About it
Remember, you are looking at the long-term investment that you don’t have to watch daily. You are an average investor that wants a stress-free life. You want to live your life, not watch stock market prices on a daily basis.
6. Make Regular Contributions
We are not about timing the market, we are in it for the long haul. Make regular monthly contributions to your investments and watch them grow.
7. Be Fearful
Everyone can’t be a winner. When it seems that everyone is winning and making a lot of money, you need to act conservatively. Don’t get over-excited. As we all know, investments can soon change.
8. Become Hungry When Others Are Fearful
The best time to buy is when the world is fearful. Be realistic, are people just having knee-jerk reactions to what the media are saying, or is it real? Be a bargain hunter and you may find it pays off.
9. Remove Unnecessary Fees
When being charged fees, become vigilant and try to reduce them in any way that you can. Banks are notorious for charging unnecessary fees, so check out what you are being charged and why. Even a fee of only one percent may seem small, but over a long-term period, just think how much it amounts up to.
Plan for failure by diversifying your investments. Put your money into different types of investments. This will reduce the risk of your investments being lost to a single failure.
If you want to protect your future, then chances are you are going to need to make some kind of investment. This means allocating some of your salary or savings and using it to secure your comfort in years to come.
By following the right advice, you can grow your money over the long term. Do your homework about the types of investments that are right for you. Start building your portfolio today and achieve the future you want.