Investing 101

For sure, investing is one of the most important aspects of your financial life. You might have heard it more than 100 times that you should start investing. But, are you familiar with what this means? Wise investment can give you great returns but walking into any venture without knowledge is a recipe for disaster. It’s, therefore, important to start at the basics as a beginner. Get to know what is investing and why it’s so important in your life.

When you invest in something, you expect returns. The same applies when you commit money somewhere in the hopes of getting a good return. This is a simplistic way of looking at it but the whole concept of investing and investments is broad and complex. But the truth is, once you start learning then it all makes sense.

Invest your money and get returns that will benefit you in the near or far off future. Not investing is not an option if you plan to have a financially sound life tomorrow and the day after. Never allow the fear of losing money to hold you back. Nevertheless, you should not do it blindly. By learning how to invest, you’re more likely to make fruitful investment choices.

Take a class or a course on Investing 101 and learn the basics that you can start applying. Test out various investment products with little money to start with. This way you build your confidence and gain vital experience. Guides like this come in handy to open your eyes and help you learn what to do and what not to do.

Investing 101

To start off, it’s essential to get the definition of investing. Investing is putting your money in different financial schemes, shares, or properties hoping to get a return. An investment is meant to multiply your money giving you a good return in the future. For most people, the type of investment most familiar is shares in the stock market. This is only one aspect of it as investing.

Once you delve into investing, then be ready for delayed gratification. Everything about this concept is long-term. In case you want quick returns then its is advisable to focus elsewhere. All investors understand this and exercise patience. Some investments can bring returns in a few years and others a decade later.

Investing calls for courage. Chances are, some investments will bring returns and some won’t. The prudent thing to do is to know how to invest and what to invest in, minimizing the chances of loss. But, total loss prevention is unheard of in this concept. Be ready to face it in some form or the other which is how life operates. Instead of letting fear keep you away from investing, learn how to invest.

The Importance of Investing

To start off, it’s good to learn what the fuss is all about. Why is it so important that you invest your money?

1. More Money

It’s the most basic reason why anyone would want to venture into investing. Who doesn’t want more money? Keeping money in an account especially a checking one does little to grow it. By learning how and where to invest, you increase the chances of having much more in the future. Why keep money when you can grow it? In case you fear losing it then start with small investments as you learn. This way you build your confidence while growing your knowledge on the best investments.

2. Achieve Set Financial Goals

Those grand financial goals that you have set can’t be reached by wishful thinking. Take certain steps to achieve your goals and dreams. Investing is one of the best solutions for attaining high financial goals that will need a lot of money. Choose an investment product that gives you a higher rate of return. It might take some time to attain what you’ve set out for but it’s better than not taking any steps at all. By keeping your financial goals in mind and investing, you get closer to achieving them.

3. Start a Business

One way to invest is to start that business you’ve always wanted to. Many people have great business ideas that can change their whole lives. The only thing holding you back is fear of failure. Once you overcome that then the sky is the limit. Starting a business is not a simple decision but it can have great rewards.

Again the best way to venture into this form of investing is learning how to do it. Once you’ve mastered the knowledge, apply it step by step. You can opt to start small and grow while learning many practical business lessons along the way. All this is done while growing the money you invested.

4. Reduce Taxes Incurred

Investing in a retirement fund is important because it can help you reduce the tax levied on your income. Any money channeled to a retirement plan is not taxed which is beneficial to your bottom line. In case you incur a loss on an investment, you have the option of applying loss against gains obtained from other investments.

5. Plan for Retirement

No one can work forever. A time will come when you can no longer rely on a job to earn your keep. It’s wise to start thinking about your retirement now as you work. This is the money you shall rely on in your golden years. There are many investments you can distribute your money into as you plan for this. This way you have a diverse portfolio with multiple sources of revenue. Start as early as possible and learn all you can to venture into diverse forms of investments. Taking greater risks and being diverse increases your chances of having a good retirement package that keeps giving you returns.

6. Beat Inflation

By investing and growing your money, you are able to beat inflation. You notice by just saving money, over time you end up losing some due to increased rates of inflation. Each year this rate increases and reduces the purchasing power of the money you have saved up. By investing, you can select products that give you better returns and help you stay ahead of inflation always.

What to Consider Before Investing?

a) Create a Financial Plan

A goal without an execution plan is doomed to fail. That is why it’s important to start out by evaluating your financial situation. As you do so, you come up with a plan on where to start and what to invest in. Don’t just sink money in anything because a friend said it’s the best.

Make your first decision figuring out what are your financial goals. After that, you evaluate what you can achieve in a short time frame and what will take longer. A plan helps you make better financial decisions and choices. To succeed, you should make a plan and stick to it.

b) Risk Apetite

Investing is all about risk. You can’t be afraid of losing money because at some point you will. That aside, it’s important to evaluate what level of risk you’re willing to take. What are you comfortable with? Granted investing has a way of pushing you out of comfort. The fact remains, in investing you can earn money and lose it as well. But you never know how much reward you can get unless you take the risk to invest. There are many investment products to choose from with high and low risk.

c) Diversify your Portfolio

Since investing involves a high level of risk, one way to reduce this is by diversifying your portfolio. Select several investment products instead of putting all your eggs in one basket. By investing in more than one product, you reduce the level of risk and stand a greater chance of good return. In any financial market, there are daily changes to keep in mind. Nothing is ever completely stable. These changes make one product ideal to invest in today and not tomorrow. By having multiple under your investment plan, you won’t incur losses only.

d) Have an Emergency Fund

An emergency fund should be separate from an investment fund. Don’t rely on the money you put into your investment portfolio to use in case of an emergency. Keep some funds away in a Money Market or Checking account that you can access fast and easily. Some form of investments take time to liquidate which can cause more harm when you need the money in a hurry.

e) Reduce Credit Card Debt

Credit cards charge high interest which chips on your monthly income. You end up paying more and more. The additional money you pay in the form of interest is better put in investing. Once you pay off all those high-interest cards then you have surplus income to channel into investment. You can no longer strain to put money in diverse investment products.

f) Consider your Employer’s Retirement Plan

Once you’re employed, inquire what retirement plans the company has to offer and sign up for them. This is another great way to diversify your investment portfolio. You can opt to have a small percentage of your income go to a 401k plan, for example, and have your employer match that. With increased income, later on, the amount you contribute can go up.

There are other options available in case your company doesn’t offer such plans as an Individual Retirement Account (IRA).

g) Monthly Expenses

Mostly, the money you invest is what remains after taking out your monthly expenses. Finding ways to cut down on your expenses is the best way to have more money to invest. It’s important to start off investing by taking a deeper look into your finances. What do you spend money on that isn’t a necessity and you can do without? That entire surplus can help you have a diverse portfolio.

Types of Investments

Investing is broad and there are many different types of investment products to choose from. You can build a diverse portfolio that minimizes your risks while increasing returns.

i. Stocks

Stocks are by far the most common type of investment that people have in their portfolio. They are quite simple to learn and start off. As a beginner, consider them as you start putting money in various investment products.

A stock is defined as a share of a company that is used to indicate ownership of it. With it, you are entitled to a portion of the company’s earnings. There are various classes of stocks each with different powers in that company. When you opt to invest in stocks then you shouldn’t be physically involved if you don’t have the time. You put in the money and have it work for you.

Stocks give you the option of investing on your own or having someone else, a broker, do it for you. As you get started, open an investment account. Most require a small minimum balance to open successfully.

After setting up an investing account, choose between an individual stock or mutual fund. A mutual fund is made up of portions of different stocks. You can opt for one or both. After that decide how much you want to invest then proceed.

ii. Bonds

Bonds are quite common and you might have heard of them before. When you purchase a bond, you lend money to a company or the national government. They, in turn, return your money at an agreed date with a return on your investment. These are the best option if you want an investment product with lower risk. The only downside is low return.

Two types of bonds exist. Those issued by the government and by private companies. They differ only in the person issuing but have many similarities. Bonds take time to give a return on investment as per the agreement between you and the issuer.

There are two ways you can make money from bonds. First, you can purchase bonds and keep them until they mature. At that time you get the principal amount and interest earned. Second, you can sell them at a higher price earning profit. Bonds are bought over the counter and only found through brokers. When buying a bond, keep in mind they’re low risk and not risk-free.

iii. Options Trading

As you diversify your investment portfolio, consider adding options into the mix. An option is a derivative contract enacted between a seller and a buyer. The buyer purchases the contract from the seller who charges a set premium. Given that options holders don’t own the asset, then they can allow the contract to become worthless in cases of unfavorable market. As a buyer, your risk is minimal compared to that of a seller hence the premium charged.

Trading options is a better way to minimize risk rather than trading assets. There are two divisions of option; namely call and put. Call options are when the buyer of the option promises to purchase the asset at a later date for a set price. With a put option, they can sell the underlying asset at a later date for a set price.

iv. Cryptocurrencies

Blockchain technologies such as cryptocurrencies have completely revolutionized the finance industry. Their popularity has driven prices up making many investors wealthy. Bitcoin is the most common Cryptocurrency across the world. Learn about cryptocurrencies and add them to your investment portfolio.

First, start by understanding that cryptocurrencies are a form of virtual currency. The reason most people invest in them is they are decentralized and not owned or controlled by any one entity. All transfers and exchanges are done online with little influence by national governments.

v. Commodities

A commodity is a tangible product that you can buy or sell. Many people who invest in commodities opt for precious metals, agricultural products, or energy. Precious metals include gold, silver, and platinum which are most common. For agricultural products, you have corn, wheat, and barley. Energy comprises of oil and natural gas.

Investing in certain commodities has higher risk than other forms. This is mainly due to the constant fluctuation in pricing experienced with these products. Some like gold and silver tend to have more stability. Others like oil are unstable and high risk.

vi. Certificate of Deposit (CD)

A good portfolio is made up of low and high-risk investment products. A CD is a type of low-risk investment you can add. This mainly involves a bank and you. You give a bank a certain amount of money and they return it with interest earned. Decide on the duration for this agreement and once it matures, you can opt to extend it. CDs are low risky and can be a great way to start off your investing journey.

vii. ETFs (Exchange-Traded Funds)

An ETF is a collection of investments that function by tracking a set index in the market. They are traded in the stock market similar to shares. They tend to be high-risk since prices fluctuate each trading day. A beginner is best suited for an ETF since it’s quite diverse despite fluctuating prices. There can be thousands of different stocks under one ETF.

It’s important to note that there are different types of ETFs to invest in. You can opt to add one or two on your beginner investment portfolio. They are Bond, Industry, Commodity, Currency, and Inverse ETFs. To buy an ETF, you can opt to use a traditional broker with a physical office or through the numerous online trading platforms.

viii. Real estate

Real estate is one of the most sought-after types of investment especially if you have enough capital to get started. With good research, you can purchase property at a low price and later sell it for a higher price. There are numerous ways to locate low-cost properties and invest in them. It’s a stable form of investing but needs a large amount of capital to start.

Beginner Investor Rules

As you start off your investment journey, keep some few points in mind. First, start with money you can afford to lose. The money you use to invest must be free from any immediate attachments. Second, do ample research before sinking your hard-earned money in just any product. Good research helps you determine what is good for you and what isn’t. This way you have more control over your investment portfolio.

Third, be patient and don’t expect immediate results. The best types of investing take long to bear any fruits. Be willing to venture into investment as a long-term plan. Fourth, seek advice from others but believe in your investment. Just because someone is opting for one investment doesn’t mean what you choose is wrong. Trust your instincts and research even after consulting others.

Lastly, keep contributing to your investment plan. Without setting money aside to invest, you can never grow your portfolio. Have a certain percentage of your income for investment.

To ever stand a chance of achieving those grand financial ambitions, one of the best strategies to explore is investing. You can start from as little as you want to feel comfortable and grow. There are different types of investments to choose from starting with low risk to high risk. The best method to apply is mixing various types to create a diverse portfolio. Investing is long-term and not the most ideal to achieve short-term goals.