Investing money might seem too complicated, especially if you are a beginner. You need to get familiar with your options and the corresponding risks to determine the optimal choice. If you want to secure a stable income and wealthy future, keep on reading. We share the ultimate guide to investing money with you!
Most common terms
Before you get yourself familiar with the basics of investing, you need to know the terms. You have probably heard about stocks, mutual funds, and P/E ratio. Do you know what these really mean? We compiled a quick and simple investor’s glossary.
- Stock is a share of ownership of a company. When you buy stocks, you have the right to claim revenue proportionate to how many shares you own. When a company performs well, the stock prices rise. When the company doesn’t perform well, they will drop.
- Mutual funds collect smaller investments from individuals and invest them in different assets.
- Bond is a way of lending money to the government or a particular institution. You are entitled to receive interest for lending the money.
- P/E ratio or price-earnings-ratio is an indicator of whether the company is doing well.
- Expense Ratio is the fees associated with a fund.
What are the different types of investors?
Before you proceed to become an investor, you need to be aware of the different styles. There is a total of three investor types:
- Passive investing is for individuals that are too busy with other activities. It allows you to invest your money without having to dedicate your time and effort. Some of the available options are ETFs and mutual funds.
- Do-It-Yourself investing gets you directly involved in the process. It is up to you to perform research, keep updated with the market changes, and track the price of your stocks. The benefit of this approach is that you have full control over your portfolio. However, the process can be quite time-consuming.
- Investors that get help from an expert. This is a combination of the two inserting styles that we already mentioned. You will need to hire a stock advisor to help you, but you will have absolute freedom.
What level of risk can you take?
Different investment possibilities come with varying levels of risk. You need to determine the money you can lose in exchange for a chance to earn more. The riskier the investment, the more money it will make. According to financial experts, you can do one thing to reduce your risk levels. They advise you to invest in different asset classes. You can choose how many asset classes you want to invest in.
These are the options you can choose from:
- Bonds allow you to earn money from charging interest. You lend the money to the government or other institutions and gain interest in return.
- Cash is a pretty safe investment. You can transfer cash on an interest-paying bank account and earn.
- Investing in property is a long-term investment that will pay off in terms of rent or increased resale value.
- Stocks come with different levels of risk, depending on the company and industry.
- Commodities are physical items you can trade, such as oil or gold.
- Futures work on the principle of speculating the future price of something.
A diverse portfolio will absorb the fast pace of the market changes. For example, diversification means that one can invest in real estate, mutual funds, and buy sticks in different industries.
Determine your goals
Every investor has a specific goal on their mind. Do you want to save for your retirement or your kids’ college? Once you determine your specific goals, you can choose the right investment option.
If you know that you will need the money in the near future, consider short-term investments. Some good examples of short-term investments are savings accounts, buying stocks, or peer-to-peer lending.
- Your investment is tied for short-term, meaning that your funds are available anytime.
- Less risky because vast and drastic changes aren’t likely to happen in a short time.
- These types of investments come with higher tax rates.
- No chance to earn lots of money.
When you don’t need the fund in the foreseeable future, long-term investments are your best option. The point is to buy stocks and keep them, with the hopes of price increases in the future.
- No headaches for you, as there is no need to follow the stock market on a daily basis.
- Decreased risk because you can wait for the stocks to go back up.
- You don’t have access to your money.
- Expect to see results in terms of good revenue in a long time.
Determine your budget
If you have extra cash or plan to save money each month, come up with a clear plan. The more funds you have, the better opportunities there are on the market. Besides, don’t forget to count in the additional fees and costs. Similarly, we bring out the most common fees that you will encounter.
- Annual fees for maintaining your accounts. These can be as high as $100 and charged once a year.
- Mutual fund fees can come up to 1% per year.
- Broker commission is another additional cost. I can come in the form of a specific rate or a fixed amount, or a combination of both.
- If you choose to work with an advisor, they will charge for their service. To avoid this cost, you can manage your investments by yourself.
What will senior investors advise you to do?
While investing is very important, you need to consider other aspects of your life. Are you really ready to start investing? Before you get started, consider the following things:
- Create an emergency fund available for you at any time. Financial emergencies can happen at any time, and you don’t want to sell your precious investments.
- Pay off existing debts. If your debt has high interest rates, then you lose money over time. Before you start investing, make sure to pay off the debt.
- Invest money that you won’t need in a short time.
If you are worried about the impacts of the global pandemic, keep in mind that professionals choose to invest. According to statistics, the stocks are likely to rise after a massive drop.