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Investing For Beginners: A 101 Investing Guide

Did you know which is the biggest misconception about investing? It is: Investing is primarily perceived as a wealthy-only activity.

Though, there may have been a time when that was true. But, companies and services today have overcome that barrier to entry by making investment options available to everyone, including newbies and those with a small amount of money to invest.

As a beginner in the world of investing, you must be filled with dozens of questions. How to start investing? Which is the best investment strategy? How much should you invest? And many more.

In this article, you’ll learn everything there is to know about investing for beginners:

First, What Type of Investor are You?

Investing your money requires you to answer the question: What kind of investor am I? Online brokers like Charles Schwab or Fidelity will ask you your investment goals and how much risk you’re willing to take when opening an account.

There are investors who prefer to actively manage their money’s growth, and others prefer to “set and forget.” Before you commit to any investment strategy, decide which type of investor are you?

Best Time to Start Investing

If you want to see solid returns on your money and assets, starting as early as possible is the best way to go. With the help of compound earnings, your little investment will snowball with time. So, the equation is simple,

More Time= Better Returns

But, how does it work?

So, let’s assume you can invest $200 per month for the next ten years with a 6% annual return. By the end of 10 years, you would have invested $24,200, but with the compounded interest, your total sum would get $33,3000; you will be earning $9,100 in 10 years, without any hassle.

Although the market will have its ups and downs during the investment, your money will grow with a decade in your wallet. This is the perk of investing young!

Want to know how much your small monthly investment adds up to in the next 15 years? Here is an inflation calculator from Nerd Wallet:

Inflation Calculator

How Much to Invest?

Many financial products have a minimum deposit requirement. However, you mostly require less money to start investing than you realize. Nevertheless, you should know about your long-term investment goals before answering this question.

As a general rule of thumb, you should invest at least 10%-15% of your annual income in retirement investments. While for the other investing goals, the expected return and your investment time horizon should be the primary determinant of your investment amount.

Investment Options

401(k)s and Retirement Plans

An easy way to begin investing is through a 401(k) plan sponsored by your employer. The benefit is especially strong if your employer offers a matching bonus, essentially free money.

The majority of financial advisors recommend contributing to a 401(k) plan to reduce the costs associated with retirement. In addition, an investment in a retirement plan can give you a leg up on long-term financial security.

401(k) contributions can be invested in one or more funds. Several types of mutual funds are available, including index funds, foreign funds, real estate funds, and bonds.

In addition to being a great way to save for retirement, a 401(k) plan also allows you to compound interest tax-free. 401(k) plans are great for saving for retirement because the sooner you start, the more you contribute, and the more money you’ll have by retirement.

Experts recommend investing 10%-15% of your salary into 401(k) plans. However, if it takes you a while to get to this number, that’s fine. Raising your 401(k) contribution is a good idea whenever you get a raise.

Bonds and CDs

Investing in Bonds and CDs (certification of deposit) is considered a fairly safer option for new investors. While securing your principle, they offer you a modest return.

Bonds

Mostly, governments and high-end companies borrow money using bonds. Essentially, they are an IOU.

So, technically, you are lending the company or government money when you purchase a bond. An issuer of bonds promises to repay you that amount and interest at a specific date in the future.

There are three types of bonds:

  • Municipal
  • Corporate
  • US Treasuries

Any investor can buy federal bonds online through the official website of Treasury Direct. People who lack the knowledge and confidence can also seek some assistance from brokers but at the cost of broker fees.

CDs

CDs are like bonds in that they hold a fixed amount of money for a set amount of time, like six months, a year, or ten years. Cashing out or redeeming a CD gives you your original investment plus interest.

By investing in a CD, you agree to keep your money there for a specified period of time. Taking your money out too soon can result in penalties.

Most CDs are purchased through banks and credit unions, not from companies or the government. Federally insured banks insure CDs up to $250,000, so you can buy one through one. With CDs, the only real risk is the possibility that inflation will outpace the growth of your money, thereby diminishing your returns over time.

Both bonds and CDs contribute to a diversified portfolio. However, if you’re old and close to retirement, investing a large portion of your money in growth-oriented assets like stocks and mutual funds makes more sense.

Stocks

According to the U.S. Security and Exchange Commission, stocks provide the highest average return among all kinds of investments for decades. But, these fruitful investments can be intimidating for beginners. The stocks are intricate and change with every passing second.

Researching the most profitable stocks and making money, along with managing the risks, is not everyone’s cup of tea.

While investing in stocks, you are investing in a small fraction of the company. The more the company grows, the more returns for you, but this growth is not guaranteed.

If you are intermediate by the stock market but want to earn great returns, you can invest your money with a Robo-advisor. However, if you opt for the hand-in-approach, the first step would be opening an investment account with a trustworthy brokerage firm.

Furthermore, you can also buy individual stocks of any particular company. But, handpicking the right company to invest in is time-consuming and could not always end in profit. 

Therefore, many experts believe that only if you believe in a company’s long-term potential should you invest in its stock.

Note: Never invest in any stock you are not interested in. You might end up incurring a huge loss.

Exchange-traded funds (ETFs)

Many ETFs operate similarly to index funds, tracking market indices and taking a passive investment approach. Additionally, they tend to charge lower fees than mutual funds. For example, a market index ETF like the S&P 500 tracks the S&P 500, just like an index fund.

The primary difference between ETFs and index funds is that index funds have a minimum investment requirement, while ETFs trade daily, and investors buy them at a share price, which is similar to the price of a stock. As a result, the ETF’s investment minimum can range between under $100 and $300, depending on the fund.

In the past, brokers charged commissions for buying and selling ETFs because they were traded like stocks. However, several brokers, including those on this list of the best ETF brokers, have lowered their trading costs for ETFs to zero. Choosing a commission-free ETF is wise if you plan to invest in ETFs consistently – as many investors do automatically by making monthly or weekly investments – so that you do not pay commissions each time.

Picking the Right Investment Strategy

Your investment strategy is determined by how much money you need to reach your savings targets and when you need to reach them.

Most of your savings can be invested in stocks if you have a savings goal more than 20 years away (such as retirement). However, picking stocks that are right for you can be complicated and time-consuming, so investing in stocks is best done through a low-cost stock mutual fund, an index fund, or an ETF.

Investing in stocks may be risky for short-term goals, such as saving up for a vacation abroad or moving across the country within five years, investing in stocks may be risky, so consider keeping your money in a low-risk investment portfolio, such as an online savings account or cash management account.

A Robo-advisor, a management service that uses computer algorithms to build and manage your investment portfolio, will open an investment account (including IRAs) for you if you can’t or don’t want to decide.

Typically, robot advisors use low-cost index funds and ETFs to build their portfolios. Robots provide a quick and easy way to get started because of their low costs and minimums. However, they charge a small fee for portfolio management, typically around 0.25% of your account balance.

The Bottom Line

Investing can be done even if you have a small amount of money. However, in addition to selecting the right investment (an accomplishment that is difficult in and of itself), you need to understand the restrictions that a new investor faces.

Taking the time to research the minimum deposit requirements and comparing the commissions with other brokers will be part of your homework. It is unlikely that you can diversify with a small amount of money by purchasing individual stocks. Additionally, you will have to decide which broker you want to open an account with.

 

 

 

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