A big part of why I started this blog was to talk about investing, especially the basics of investing. It’s such an important part of a strong financial foundation. Those who don’t invest may shy away because it seems too complex, or out of fear of losing money without professional guidance. However, when armed with the basics, anyone can start investing with confidence. So let’s get started with some investing basics with my investing 101!
First, it’s important to understand the benefits of investing. I’ll get straight to the point – to make a profit of course! While that’s the end goal, the overall concept is to use the money you already have to make more. Thanks to a little something known as compounding gains, over the long run your net worth can substantially increase. This provides the opportunity for many things, including a potential early retirement!
What is Compounding?
So what is this concept of compounding you ask? To put it in simple terms, it’s generating earnings from previous earnings. Say I start with $100 and earn 10%, now I’ll have $110. Keeping that $110 invested, say I earn another 10%, instead of that earning me $10 as with my original investment, now I’ve earned $11. Continue to do that 20-30 times and you’ll start seeing much bigger and bigger gains the longer you keep your money invested.
Think of it like the snowball effect. Roll a small snowball down a hill and what happens? The more it rolls, the more it grows. Maybe a little at first, but the longer it goes, the more size and speed it accumulates. While your money won’t be careening down any mountains (would be cool though), it will grow in the same way as the snowball over time. Instead of snow, the growth of your investment is due to the accumulated compound interest rate (and schedule) associated with it.
How Much is Needed to Invest?
A lot of non-investors think a large amount of money is required to get started. The truth is, you can begin investing with very little money. Many mutual funds have initial investments as low as $100. Yup, you can get in the game with a single Benjamin. Stocks can have prices in the single digits as well. After the initial investment, even a $20 monthly contribution can provide a great head start to financial stability over those who don’t invest.
How\Where to Invest?
You’ve decided to start investing, but don’t know how to start or where to begin. Lucky for you, there are a lot of options for individual investors (like you and me). Research the well-known players such as Charles Schwab, Fidelity Investments, or E-trade. To attract investors, most platforms offer little to no commission fees on a trade, as well as no monthly fees to have an account. Pick one that’s a good fit for you and start investing!
Mutual Funds & Stock Investments
Your brokerage account is set up… now what? Beginner investors may not know the first thing about picking stocks to invest in. Online research can be overwhelming. Full of conflicting strategies, confusing metrics, and unfamiliar terms (sigh).
Lucky for you, you don’t need to pick individual stocks yourself, that’s what we have mutual funds and Etfs (exchange traded funds) for. Mutual funds and exchange traded funds are a good way to start investing since they diversify your investments, meaning they are a collection of stocks bundled together. This way you’re not putting all your eggs in one basket. Having a diversified portfolio is an important concept when investing. The advantage to this option is at any given point, while one stock in the bundle might tank, another may soar – so the risk and any volatility is offset. Mutual funds are managed by experts that actively buy and sell stocks at the right time for you. Keep in mind, this service does have fees associated with it.
These fees are called expense ratios. Mutual funds and Etfs are actively managed, meaning there is a team of traders, researchers, a fund manager, etc. actively making trades on your behalf. They might buy stocks and bonds complete, sell shares of one stock in order to buy another, anything they see fit to get the best returns. In order to keep everything running, the costs are typically passed on to those investing money in the fund.
If you prefer a more “set it and forget it” strategy, look to start investing in an index fund. Index funds share the same concept as mutual funds, but with much lower management service (and fees). They typically rise and fall with the market. In most cases, these index funds that are left alone over the course of 10+ years will actually outperform an actively traded fund, making them the preferred method for even some of the most seasoned investors.
Once the initial index fund investment is complete, I highly recommend utilizing the automatic investing plan. The feature transfers money from your bank account directly to your investment account. You can customize the amount, as well as how often the transfer takes place (monthly, quarterly, annually). Stick with it, and in 30 years you’ll have a nice nest egg waiting for you!
Looking for something a little more exciting? I hear you. If you’re comfortable with higher risk levels, you can attempt trading stocks on your own. While it’s tempting to set your sights on hitting it big with the next Amazon or Netflix-type situation, slow your roll. Before investing your money, take some time to familiarize yourself with the stock market scene. You can start investing by buying stocks with established companies that have a long track record of consistency and high performance (aka blue-chip stocks). While this may seem less sexy, you can still experience substantial gains. Remember Warren Buffets rules of investing:
- Don’t lose money
- Don’t forget rule number one
As much as investing in the stock market is about making money, it’s more about not losing money. Listen to the Oracle of Omaha and pick safer stocks to build a base of steady growth. He didn’t get to where he is by investing money where it didn’t provide value. Having a well-rounded investment portfolio will serve you best.
When do I Sell?
Well, that’s up to you. Many people aim to sell at the highest price, but that’s easier said than done. A more helpful strategy is to determine what you want from an investment before you even make it. Decide in advance if your investment is long-term (gain wealth over time) or short-term (make a quick buck). Another way to look at an investment is in terms of how you’ll measure gains. For example, are you looking to make a certain dollar amount or a certain percentage of your initial investment?
And don’t forget, it’s not all about the gains. When it comes to stocks, they have the tendency to, you know, go down in value too sometimes. It’s also beneficial to determine a “cut your losses” mark, especially if you decide to take high-risk routes.
These are questions only you can answer. However, if the goal is set beforehand, it will be easier to determine the best time to sell.
Overall, the stock market is a tool that can be used by anyone to grow their money. Whether you have $100 or $1 million dollars, investing is the best way to get ahead of the game. The hardest part is jumping in. But, once you do, you’ll see there was never anything to be afraid of. Like anything else, ease your way in and start simple to avoid common mistakes. Take the time to educate yourself, learn a few investment strategies to find one that fits your risk tolerance. Then venture out into the vast opportunities available to you.
Still feel like the stock market isn’t for you? Then take a look here to read about alternative ways to make your money work for you!
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Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.