Important aspects of Investing for Beginners and Intermediates

Do you ever feel a bit… incompetent when you hear about other people’s financial success stories?

You’ve heard of them: people like the 28-year-old who retired last year after making so many savvy investments. Or the former schoolteacher who is now a stock trader who only teaches because he loves his kids, not because he needs the money.

That’s something we could’ve done, right? Why can’t it happen for us if it can happen for them?

A savvy investor merely seeks to convert his existing and prospective assets into a more secure future. A savvy investor views money in the same way that a good gardener views vegetable seeds: as a tool that, over time and with some careful loving care, may help you and your family construct a more vibrant and secure future.

Why You Should Invest

Many people would think this a no-brainer, but it’s nevertheless a helpful reminder for anybody considering an investment: money invested should be growing money. It’s a simple equation: money Plus time equals more money. Even if we don’t actively manage our money, it can increase.

For example, owning a home might be considered an investment. Homeowners anticipate that the money they invest in their homes will improve in value over time as real estate values rise. (We’ll go over this in further detail later.)

A savings account is another type of investment since the bank pays interest on the money you save, and high-yield online savings accounts provide the greatest rates.

To Increase Your Earnings, You Must Go Beyond Savings

For some investors, even the greatest savings rates aren’t enough. And with good reason: not only may a more sophisticated investment yield you more money, but a savings account can also be tedious. Sure, it’s a fantastic start, but will savings alone get you to a more secure financial future? Given enough time and deposits, it is conceivable. But consider that question for a moment. Let’s say you have $10,000 and want to put it in an online bank where you can earn 1.5 percent interest.

If you didn’t make any deposits or withdrawals for ten years, your $10,000 would have grown to $11,617.25. Isn’t that good? For letting the money stay there, unused, for a decade, you get a free $1,617.25. Yes, there are worse things you could do, but there are also better things you could do. Consider what would happen if you had $10,000 and received 5% interest for ten years. (Your $10,000 would become $16,470.09 in this case.) That ten grand would be worth $27,126 in 20 years.

Savings accounts are rarely offered at favorable rates by banks. You’ll need to learn about more aggressive tactics to gain greater investment power.

How To Get Started With Investing: Important Things You Should Know

Don’t get me wrong: I think it’s great. A good savings account is always welcome. However, if you’re planning for the long run — retirement, education for your kids, a beach property — more active investing may be necessary.

“Risky” does not have to imply “more active.” Before giving over any money, check out for sure what you’re getting into. If you’re not sure how an investment works, talk to a financial counselor (or read our Investing for Beginners post if you are really starting from scratch.) You’ll find useful information on a variety of investment options below. If you’re serious about investing a substantial chunk of money, I recommend using a platform like SmartAsset, which connects you with a Financial Advisor. Before we get into the specifics of how to begin investing, there are seven things you should be aware of.

1. Begin now, and begin small.

When it comes to investing, the first thing you should know is that you want to get started right away and start small. The only reason you want to begin now is that you want to gain experience. If you have no prior experience with investing, one of the simplest ways to learn is to simply do it. There are several different applications with which you may get started for free. Here are some of my personal favorites:

• Wealthfront
• Betterment
• Robinhood

2. Recognize the significance of compounding interest

Compound interest is simply the concept of your money rising over time. The more time you have on your hands, the longer it will take to develop and the bigger it will be. But, by far, the most significant stumbling block for most novice investors is that once they begin investing, they simply stop adding to it.

3. Recognize that investing isn’t a game of chance unless…

The third thing you should know about investing is that it is not a kind of gambling. Unless you’re attempting to make a quick profit on an investment you don’t understand, investing isn’t gambling. Penny stocks and cryptocurrency are the two worst offenders, in my opinion.

4. Recognize that inflation is a reality.

The fourth point to remember about investing is that inflation is a real issue. When most people think about inflation, they think of elderly folks discussing the price of fuel and milk. In reality, inflation is a measure of buying power. Is the value of your dollar today going to be the same a year from now, five years from now, or twenty years from now? And, believe me, when I say this, inflation is real. The concept of purchasing power is genuine.

5. Investing is how the wealthy become wealthier.

The sixth thing you should know about investing is that it is how the wealthy become even wealthier. Let’s face it: if you want to develop money, if you want to enhance your riches, if you want any chance of retiring early or even reaching financial freedom, you must begin investing.

6. It’s Unavoidable to Lose Money

I won’t say it’s the most significant factor, but it’s the one that catches a lot of people off guard. When it comes to investing, you’re almost certain to lose money. It can’t be avoided. You’re going to be out of money. I don’t care whether you’re a fantastic investor.

7. Don’t let your emotions get the best of you.

Don’t let your emotions get the best of you. When it comes to investing, emotions will play a significant role. When fear takes hold, individuals might act irrationally. Don’t allow your feelings to get the best of you. Allowing FOMO to creep in and persuade you to rush into other assets such as bitcoin or penny stocks that you don’t understand is not a good idea. Don’t let your emotions get the best of you.

Types of Investments to Begin With

Let’s look at some of the many sorts of investments available and how to use them.

• Bonds
• Brokerages
• Commodities
• ETFs
• Mutual Funds
• Peer-to-peer lending
• Real Estate
• Investing in Small Businesses
• Stocks

Bonds

The majority of us are familiar with stock purchases. When you acquire stock in a firm, you’re hoping that your investment will rise in value in tandem with the company. Bonds are a different method to invest in a corporation or a government entity like your local school district or the Federal Treasury.

When you buy a $1,000 bond, you’re lending $1,000 to the bond issuer or the government for a fixed period of time. Let’s pretend you’re buying 10-year bonds for this scenario. When the bond matures in ten years, you’ll get your $1,000 face value back. You’ll earn a yield until then (or until you sell or trade the bond), which is the amount of interest you’ll collect in exchange for giving up $1,000 for a decade. So, if the bond pays 5% interest, your annual return would be $50 – not exactly eye-popping, but you have to start somewhere.

If you had 20 $1,000 bonds, for example, the cumulative yield could cover the cost of the 21st bond, and the yield of the 22nd would cover the cost of the 23rd, and so on. The race is won by going slowly and steadily. Bonds, contrary to popular belief, are not risk-free investments. Bonds are more stable than stocks in general, but you might still be in danger if you buy bonds from a firm that goes bankrupt.

Consider blending in some lower-yielding but lower-risk choices, such as Treasury notes, to diversify your portfolio. Developing a connection with a reputable broker might help you stay on target.

Brokerages

You are not obligated to use a brokerage business. Sitting down with a broker, like an afternoon tea or prime time television, might feel a touch archaic in this era of crowd-sourced loans and Robo-advising algorithms. If you have a few thousand dollars to invest and want to test how well you can do it yourself, a broker’s charge might eat into your profits and take away a lot of the enjoyment.

A real-life broker, on the other hand, can provide something that the more cost-effective alternatives can’t: a big-picture perspective. A broker can assist you in developing a diversified strategy that fits your individual goals and obstacles if you’re serious about leveraging your existing and expected resources to build a more vibrant future. He or she can spot opportunities that a Robo-advisor would overlook. If this is the case, the brokerage fee will have been well spent.

When looking for a broker, keep the following in mind:

• Look for someone you like: You’ll be exchanging personal information and discussing your future aims and objectives, which may sound excessively straightforward. When you feel at ease with and trust your broker, you’ll have a better experience.
• Inquire about the independence of the broker: Independent and captive brokers can assist you in creating a portfolio that is tailored to your specific needs. A captive broker, on the other hand, will be responsible for selling his or her company’s financial goods.
• Combine and contrast: If you have a traditional broker, it doesn’t mean you can’t have some fun investing online as well.

Commodities

Finances have become increasingly abstract over the years, from bartering to the Gold Standard to paper money. In fact, many of us now only see money as figures on a screen. Some individuals may find the entire process to be a bit fragile, and these thoughts may deter them from entering the financial field.

Commodity trade, on the other hand, is typically simpler to accept. Oil, grain, and precious metals are examples of physical commodities. If you acquired two ounces of gold last year and the price of gold rose this year, you might sell it for a profit, maybe without ever leaving your neighborhood. With gold, it seems easy enough, but what about oil? Where would you keep 1,000 barrels of oil if you bought them?

What would you do to keep it safe? When you wanted to sell, where would you look for a buyer? Who would be in charge of delivering it to the buyer? Yes, the desired tangibility can cause some issues. As a result, modern traders have made certain modifications to the age-old practice of commodities dealing, making it more accessible to newcomers. You could do the following:

• Invest in commodity-producing firms, such as steelmakers, rubber manufacturers, energy companies, and so on. You’d have access to the commodities market without having to handle the real goods.
• Purchase commodities futures, which relate to a commodity’s future set price. This is tough, and getting started generally necessitates a large sum of money upfront. I’d consult a broker about this.
• Invest in commodities using exchange-traded funds (ETFs) (ETFs). This is the most adaptable and approachable method. In essence, you’re investing in a wide range of commodities without taking on the obligations of ownership. Next, we’ll go further into ETFs.

Read Also: When You’re Over 50, You Need Life Insurance

ETFs (Exchange-Traded Funds)

Diversification appeals to investors for a reason: Portfolios with a diverse range of investments are more likely to weather a financial storm than portfolios with identical investments. It takes time to diversify your investments when you acquire them in little increments.

Exchange-traded funds (ETFs) are a convenient way to invest. ETFs aggregate a variety of investments, such as stocks, bonds, and commodities, and divide them into shares that you may buy, sell, and trade throughout the day. As a consequence, you may invest less money while still achieving diversity.

To invest in an ETF, you’ll need to open a brokerage account and keep in mind that while ETF shares provide rapid diversification, they are not risk-free. Your broker or financial advisor can assist you in tailoring your purchase to your specific requirements. If you want additional liquidity, avoid sparsely traded ETFs, which might be difficult to sell.

Mutual Funds (MFs) are a type of investment

Mutual funds act similarly to ETFs in that they aggregate other investments to provide convenient diversification. When you try to purchase or sell shares, the major difference between ETFs and mutual funds becomes obvious.

On an exchange, you can’t purchase, sell, or swap mutual fund shares. Instead, you’d go via a mutual fund broker to purchase shares. As a result, a mutual fund’s price per share is determined once per trading day and does not move with the market during the day.

When investing in a mutual fund, consider management costs first, just as you would with an ETF. Percentage-based fees may appear to be minor annoyances, but they may eat into your revenue. Management expenses, especially when paired with brokerage fees, might catch you off guard if you don’t know what to anticipate.

Options

Let’s pretend you’re flying to New Orleans for Mardi Gras. You’ve discovered a wonderful price on a ticket, but you’re not sure you’ll be able to travel because your sister is expecting a baby around that time, and you’d like to be there. What would you do in this situation? You will lose money if you book a flight but decide not to take it. If you wait until the week before you want to go to book a flight, it may cost five times as much.

Many airlines, as you are surely aware, charge a price for cancellation insurance. If your sister goes into labor or something else comes up, you may cancel your ticket and obtain a refund if you get the insurance. The choice does not force you to cancel the flight, and you will not be reimbursed for the insurance money if you go to New Orleans as scheduled. It has fulfilled its obligation by providing you with the opportunity to cancel, even though you did not require it.

Investments and options function in the same way. Instead of preparing for the birth of a child or a job emergency, you’re preparing for unpredictable economic conditions. You might be able to do one of the following things if you choose one of the options:

• Regardless of market conditions, sell an investment at a specific price (put option)
• Purchase an investment product at a specific price, even though it is currently selling for a higher price (call option)

Options have expiration dates, so mark them on your calendar so you don’t forget to use them or decline to exercise them. Because you’re planning for the what-ifs, options allow you to invest more aggressively.

Peer-to-peer lending

When peer-to-peer (P2P) lending first became popular a decade or two ago, it appeared like a great equalizer – a means to borrow money without having to pitch your concept to a bank loan officer. And, despite some negative news due to investment losses, I still enjoy the concept.

You’re investing in borrowers when you invest in a peer-to-peer lender. The interest that the borrowers pay fuels your earnings when they return their loans.nNaturally, you lose money if a borrower does not pay back the loan. Traditional banking operates in a similar manner, which is why lenders use credit ratings and debt-to-income ratios to assess a borrower’s ability to repay a loan.

Most P2P platforms also provide a risk rating to loans depending on your willingness to take on the risk of funding the loan. Riskier borrowers pay higher interest rates, therefore you may make more money by funding riskier loans… assuming the borrowers pay on time.

Lower-risk loans have a better chance of being repaid, but they also have lower interest rates. When it comes to investing in P2P loans, you must strike the appropriate balance, just like anything else in life. Your own comfort level has a lot to do with this balance.

Investing in real estate

Real estate investing, like commodities, has a long history. The first records of landowners making money from their properties date back to the dawn of writing. And, historically, the land has increased in value over time, making it a sound investment. In contemporary times, we’ve improved the process: land developers, for example, boost the value of the property more rapidly by maximizing its earning potential so they don’t have to wait decades to make a profit.

Individual investors who flip properties perform the same thing on a smaller scale. In a word, you acquire a property, make improvements to it (often significantly), and then resell it for a greater price. Other investors keep rental properties up to date in order to receive rent from tenants. Land development, house flipping, and becoming a landlord all need a large sum of money upfront. Property must be purchased, improved, updated, and maintained, all of which can be costly. Many would-be investors are turned off by this stumbling block.

So, how can you get started without spending a lot of money?

Four words: real estate investment trusts (REITs), which are similar to mutual funds in that they invest in real estate. You purchase shares in a pooled real estate holdings fund and delegate property management to someone else. You make money because the properties make money.

Although REITs lessen the entry barrier to the real estate market, a little knowledge still goes a long way. A skilled broker can assist you in getting into the game and understanding the dangers and expenses involved. If you need to liquidate your assets fast, a REIT may not be the best option because selling shares might take a long period. I’m also a huge admirer of Fundrise, a website where you can choose whatever real estate projects you want to invest in and invest in them online.

Investing in Small Businesses

To get started, most small enterprises require funds. Other small firms want funds to grow, remodel, or purchase new equipment. A company in need of funds will need investors, and there are two typical ways for investors to participate:

• Investing for equity: When you make an equity investment, you become a part-owner of the company. You can make a lot of money if the business develops a lot after you invest, depending on how the business divides its income.
• Investing to pay off debt: When you invest in this way, you’re effectively lending money to a small firm. Your reward comes in the shape of loan interest payments. Your earnings will not be directly linked to the company’s growth, but you will not be in danger of losing everything if the company fails. (If you have a lien on the company’s office equipment, you may be able to recoup part of your money.)

Which path should an investor take: the high-risk possibility of equities investment or the more steady method of debt investing? No one can answer that question for you, as you well know. Your response will be determined by the specifics of the company you’re investing in as well as your own tastes.

Peer-to-peer lending has made it simpler than ever to invest in debt. Take the time to learn about the loan application and its ratings before investing your money, just like you would with other peer-to-peer loans. Also, before investing in stock, look into the company’s long-term intentions. Find out how the firm intends to create money, and decide for yourself whether you believe it will strategically invest your money in the future to achieve success.

Stocks

Buying stocks is the preferred way of investment for many new investors. Buying shares in a firm, whether through an in-person broker, an online adviser, or an algorithm-based program, connects you to the greater economy right away. A good in-person broker, though not necessarily essential, might be money well spent if your broker helps you locate stocks with better-earning potential.

If you’re not ready to commit to that degree of commitment, an online discount broker may be the answer. You’ll almost certainly need to create a brokerage account regardless of whatever path you select (though some companies do sell stock directly to shareholders.) Using a Robo-advisor, you may now adopt an even more passive approach to investing. You tell the Robo-adviser how aggressive you want it to be, then sit back and watch it manage your money. Two of the most popular Robo-advisors are Wealthfront and Betterment.

Set aside a portion of your investment earnings for tax purposes.

State and federal governments will receive a portion of your investment gains, whether you want it or not. I won’t try to describe the details here because you could spend weeks reading about tax rules and still learn a lot. If you’re worried about how much you’ll owe in taxes, I recommend consulting with a tax specialist, either online or in person. Meanwhile, here are a few things to keep in mind:

• Don’t let taxes sway your investment decisions too much: I’ve had customers pass up excellent investment possibilities because they didn’t want to pay the taxes that would come. Taxes are inconvenient, but they shouldn’t deter you from earning money.
• You are taxed on your profits, not necessarily on the balance in your account: It’s the money you earn (not what you own) that matters for next year’s income tax returns, whether you’re earning interest, stock dividends, or profit from real estate.
• Some government-issued bonds may provide tax-free interest: Their yields, on the other hand, are likewise on the lower end.
• When you can, get free help: Leading Robo-advisors can assist you in keeping track of taxes due on current profits.
• The tax system, in general, promotes money laid up for retirement: Tax laws incentivize us to put money aside for retirement. We’ll go through this in further detail later.

Investing for Retirement Purposes

As I previously stated, investing money may assist us in planning for a more prosperous future. Many individuals dream of a time when they won’t have to work. That’s why saving for retirement has turned into a full-fledged industry. It’s also why the federal tax code encourages retirement savings by providing tax breaks for certain assets.

These benefits only work if you take advantage of them, and the ideal time to start is now. Even if you’re just 30 years old. Even if you’re under 30 years old. It’s never too soon to begin making plans for the future. With that in mind, here are several excellent retirement-savings tools to consider.

• Employer-Assisted Funds
• Annuities
• IRAs
• Social Security
• Others

IRAs

Anyone in the United States who is lawfully employed is eligible to create an Individual Retirement Account (IRA) (IRA). When you put money into your IRA, you get the following tax benefits:

• A typical IRA allows you to make tax-free contributions of up to $5,500 each year ($6,500 if you’re 50 or older). When you withdraw the money later in life, you must pay taxes on it.
• A Roth IRA may not provide a tax advantage right away, but it allows you to withdraw funds tax-free later in life.

Employer-Supported Funds (ESFs)

Your company may be able to assist you in opening a 401(k) retirement plan. Your (and your employer’s) contributions will be tax-free. When you withdraw the money later in life, you will be taxed on it. 403b plans, which function in a similar way, are used by certain businesses, particularly non-profits and government organizations.

Employees at other companies can participate in pension schemes as a perk. You pay into a pension plan, and your company may invest all of your payments to establish a better pension fund. After that, the fund distributes funds to the company’s retirees.

Annuities

Annuities are products sold by insurance companies that allow you to preserve a portion of your current income for later use. You can pay a flat payment or make ongoing contributions to an annuity. To allow for growth, some annuities link your money to other assets, like stocks, or to a complete stock index, such as the S& P 500.

When you retired, healthier annuities result in larger yearly payments. Check with your insurance agent about early withdrawal penalties before purchasing an annuity, and make sure you’re okay with any risks associated with stock-related annuities.

Social Security

Many seniors rely on the government Social Security program for monthly payments. While you may not have complete control over your Social Security investment, you can enhance your benefit by:

• Before retiring, work as long as feasible.
• Working in a more lucrative field.
• After becoming eligible at the age of 62, you must wait many years before collecting payments.
• Examine your financial statements to evaluate how well you’re doing. (If you’re under 60, they may appear to be junk mail and will arrive every five years.)

Other Retirement Resources

A retirement planner or certified financial planner can help you develop a retirement plan that meets your individual needs if you can afford to employ one. As I have stated, beginning while you’re young will make a significant impact. It’s much more critical to get off to a solid start today if you didn’t start in your 20s or 30s.

Investing isn’t a one-size-fits-all kind of thing.

Maybe you’re just having a good time. Perhaps you’d want a second source of income. Perhaps you’re pondering the future. Maybe you’re just interested in how things operate. Whatever piques your curiosity, knowing the ins and outs of investing might take decades. After that, you’ll still have a lot to learn since, in a fast-paced economy like ours, new technologies emerge on a regular basis.

Yes, it might be scary, but the good news is that there’s a strong chance you’ll be able to discover an investment strategy that fits your lifestyle and goals. If you need to ease into investing, consider bonds or mutual funds. Consider equities or exchange-traded funds (ETFs) if you enjoy fast-paced investment. Do you like to be guided? Look for a reputable local broker. Do you like to go it alone? You might use a bargain broker or even a Robo-advisor.

Find your route and keep track of your progress so you may have a more secure future.