Investing makes it possible to earn money through an alternative means to working or owning a business. When you commit money to an investment of some sort, you expect to earn a profit. While most people understand the reasons for investing and the benefits of successful investing, it can be difficult to figure out how to get started. Here is what you need to know about investing as a beginner:
Types of Investments
There are several different types of investments. As a beginner, you will want to understand the options, their tax implications and risk level of each type of investment.
Bonds: fixed-income securities that allow you to earn an interest on your money as well as the original amount of money you lent out. When you purchase a bond, you are lending the money to government or companies in exchange for interest. Bonds are a very low risk investment opportunity as they are almost guaranteed risk-free — meaning you will get back the amount you invest. In exchange for offering a risk-free investment opportunity, bonds offer very little return on your money.
Stocks: investing in stocks is the equivalent of buying a small percentage of ownership in a business. You can vote during shareholders’ meetings and you will receive profits the company allocates to company owners which are called dividends. Stocks are considered high-risk investments and their value fluctuates daily. To earn a profit on a stock investment, the stock must increase in value. While you are at risk of losing your investment in stocks, there is also a potential for a relatively high return on your investment if the stock you purchase does well.
Index Funds: a single investment that allows you to buy partial ownership in several different companies traded on the stock exchange. It ensures you have a diversified investment portfolio to limit your risks, and gives people with a small amount of money to get started with investing.
Mutual Funds: a collection of stocks and bonds that are purchased by a group of investors. When you buy mutual funds, you give a professional mutual fund manager the ability to select the specific mix of bonds and stocks that are purchased within the fund. The idea is you can invest without spending time and effort researching all available investments since the manager will have more knowledge of the market and potential for the fund to earn a return than you would have.
Alternative Investments: the majority of investments fall under either stocks or bonds (or a combination, like mutual funds); but there are other opportunities for investments including FOREX, real estate and gold, among others. As a beginning investor, these types of alternative investments are probably not the best place to get started.
Read: What Is A Stock?
Put Your Money to Work for You
Most people are taught in order to make money, they have to go to work or run a business. In other words, to increase your income, you have to work more hours. Even if you are successfully able to work more and make more, you no longer have time to enjoy any of the money you earn if you are tied to your job all week long!
Investing your money in stocks, bonds, or mutual funds allow you to earn a return for the money you commit to the investment and through the power of compounding interest, the money can continue to grow without you trading your labor hours for a profit. While you are working in your job or running your business, your investments can also be earning money. Compound interest generates earnings on your asset’s reinvested earnings. The longer your money remains in a particular investment, and the more frequently the interest is compounded — the more money you will earn. This is why the younger an individual is when he or she begins investing, the greater their potential for earnings will be.
To make your first investment, consider an Index Fund (you might look at companies such as Etrade or Sharebuilder to get started) or make a bond purchase directly from the U.S. Treasury.