Investing is a perfect tool for building wealth, but it is not the only reason for its popularity. Different vehicles make it easy to start with small amounts and add to them from time to time.
This tutorial will help you start investing. It will explain what investing is and how to invest properly. It will cover the building blocks of investment and provide the insights into techniques that will help you choose the appropriate strategies and vehicles.
What Is Investing?
In investing you should work not harder but smarter. We all work hard every day. Investing is a perfect tool to make the most of our money.
Investing is about priorities as well. It is a pleasure to spend – whether on a new outfit or the vacation. Such things make our life more enjoyable. But investing is about prioritizing our future financial revenue over our present desires. Investing is a way to a happier ending.
Why do you want to invest? Are you trying to save money for a long-term goal, like comfortable retirement or paying for a college education for your children?
One might have various types of investment for various goals. It is crucial to understand what you are investing for and what outcomes you want to get.
The parts of the goal-setting process are time horizon and risk tolerance.
In the context of investing, we consider the risk of losing your money. It’s the risk that the money you’re investing can decrease in value, even to zero.
Any investing involves risk. Stocks can go down in value over a definite time period.
When you need the money, your risk tolerance will be in part a function. In the 20s or 30s, you will not think that much about fluctuations in the value of your investments. But when you are 60, you’ll have a lower risk tolerance because you won’t have time to recoup a loss of your investments’ value.
Your investments must be aligned with the time horizon in which you need money.
For example, young parents that invest in the college education of their newborn can take more risk thanks to their time horizon. They will have to adjust the investment mix when their child goes to high school. It will prevent them from major loses.
How long will you retain one particular investment? Some investors sell the stock they have every day, and some do it rarely. The last is a bad idea for beginners. As a matter of fact, they say that online business is a great investment these days. Though you should make your research.
No one tells you to hold for one particular investment until the end of your life. Review your individual holdings from time to time to be sure they are suitable for your situation.
There is a wide range of investment types and styles. Stocks, bonds, mutual funds and ETFs, real estate, alternative investments are only a few examples.
After purchasing stock shares, you participate in the success of the company via the stock’s price increases and dividends this company might declare. In case of liquidation, shareholders have a claim on the assets of the company but don’t own them.
Thanks to bonds, an investor can loan money to the issuer in exchange for periodic interest payments. Bonds are issued by the federal government, corporations, governmental agencies, and municipalities.
A usual corporate bond may be worth 1000$ and pay interest semi-annually. The bonds’ interest is fully taxable.
The same way as stocks, bonds can be bought on a secondary market or as new offerings. Their value can increase or go down depending on various factors.
The prices on bonds move inversely with the interest rates direction.
But investing is about prioritizing our future financial revenue over our present desires.
A mutual fund is a portfolio of shares selected and purchased by professional financiers for a lot of small investors. Thus, the depositor reduces the risk, as his investments are distributed among a large number of different enterprises.
These funds are valued at the end of the trading day. After the market closes, the shares are bought or sold.
Mutual funds can make distributions in the form of interest, dividends, and capital gains. In case a mutual fund is held in a non-retirement account, selling it can result either in gain or a loss of your investment.
Exchange-traded funds are similar to the mutual ones. However, they are traded on the stock exchange during the trading day. The ETFs are valued all the times when the markets are open.
Have a plan and a strategy
Just like traveling by car, it is essential to have a plan and a destination before investing. Your goals dictate your time horizon, which defines your tolerance to risk. To succeed, ensure that you diversify your investments. In case most of your portfolio investments do bad, some others should go well. Create a portfolio that is in line with your risk tolerance.
We hope that our guide provided you with some insights and good ideas on how to invest in your future.
Your journey is just starting. Continue learning and stay informed.