How to Start Investing: Tips for Beginners
An investment is an asset you purchase now in hopes that it will be worth more in the future. Investments are an important part of retirement plans and other financial obligations because they attempt to make your money work for you over a period of time. When you make investments, you may not be able to plan for the exact investment income you’ll receive, since the value of your investments fluctuates.
When you’re ready to invest, choose the type of investment account to open based on your financial goals. You may choose to open a:
- Retirement account: A retirement account is a long-term investment that aims to grow your money so you can retire. There are several different types of retirement accounts you can invest in and many offer tax breaks or other advantages.
- Brokerage account: You open a brokerage account through an investment brokerage to help reach your financial goals. A financial advisor designs an investment strategy that suits your needs and makes adjustments along the way to ensure you’re on track to reach your goals.
- Trust: With the assistance of a financial planner or attorney, you can establish a legal vehicle that allows you to bundle your assets and eventually pass them on to a beneficiary. A trust is a safe way to minimize taxes on your assets and ensure your wealth is distributed properly after you pass.
It’s important to know about investment options and different strategies available when creating your financial plan.
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When you buy stocks, you’re taking on shares in the ownership of a company. Also referred to as equities, you buy stocks in a company for a fixed price, which may be a few dollars or several thousand per share. The value of these stocks fluctuate as the stock market and valuation of companies change.
Stocks are a simple investment option because they’re easy to buy and usually stay ahead of inflation. As the economy grows, stock values and options also grow. You may choose the type of stocks you want to purchase and when you’re ready, these investments are easy to sell.
When you purchase investment bonds, you’re using your money to provide a loan to a company, corporation, or government entity. You make your money through the interest the borrower is required to pay or by selling your bonds for a higher price.
The volatility associated with bonds is lower than with stocks since they don’t depend on the valuation of the company or market trends. If you hold your bond to its maturity date, you’re guaranteed to get your investment back. Bonds are also easy to sell and you’ll still receive your money if the borrower goes bankrupt.
A mutual fund is a mix of investments bundled into one investment vehicle. Mutual funds allow you to invest in a variety of stocks and bonds without the tedious work of manually choosing individual investments.
Since a mutual fund is diverse, you generally experience less volatility. The bundling of your investments into one also makes it easier to track and easier to invest in specialized markets. Mutual funds are associated with low trading costs and are an easy way to manage your investment money.
Exchange-traded funds (ETFs) are investments that are bundled together like mutual funds but traded on the market throughout the day, similar to stocks. They’re purchased for one share price, which is usually lower than a mutual fund. With more affordable prices, these investment funds are good for small investment budgets and offer flexibility.
When you purchase EFTs, you also receive tax benefits on your investment income. Since EFTs bundle together different investments, they’re a great way to diversify your investment portfolio without choosing individual stocks.
The investment strategy you pursue depends on whether you’re saving for college, retirement, or another financial goal.
Short-Term Investment Strategies
You should follow a short-term investment strategy if you only want to invest your money for three years or less. You may choose to set up short-term investments in a variety of ways, such as setting up a savings account or money market to fund an upcoming vacation or pooling your money together to start a franchised business.
Short-term investments allow you to retain access to your money so it can be easily liquidated in case of an emergency. Depending on the type of short-term investment you choose, you may also be able to increase your profit quickly. Short-term investments protect your long-term investments by ensuring you have access to your money when needed.
Long-Term Investment Strategies
When you plan to invest for 10 years or longer, you’re using a long-term investment strategy. Long-term investments are meant to be purchased and not sold for a long time, if ever. If the goal of your investment strategy is long-term, such as setting up a college fund or retirement income, put your money in long-term investments, such as real estate, stocks, or bonds.
- Invest early: The sooner you invest your money in a vehicle, the more likely you are to make money.
- Set goals: It’s important to have financial goals set before investing since these will determine which type of strategy you use.
- Use automatic investments: The less work you have to do, the better. Set up automatic investments through a financial advisor or look into investment apps that don’t require constant supervision.
- Set up retirement accounts: When you set up retirement accounts, you’re investing in your long-term financial future.
- Be wary of commissions: Financial advisors may charge commissions and fees, so review these charges thoroughly before you begin investing.
- Diversify your investments: When you invest in several different vehicles, you’re more likely to make a profit and you take on less risk.
- Stay informed: Even if you use a financial advisor, stay educated on the latest investment vehicles to ensure your strategy remains in line with your goals.
Benefits of Investing
There are many benefits to investing, including the following:
- Meeting important financial goals.
- Earning financial freedom.
- Saving on taxes.
- Getting to retirement quicker.
- Having money to leave to loved ones.
Investing is one of the best ways to ensure you can meet your short- or long-term financial goals. By following a suitable investment strategy, you can watch your money grow over time.
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This post was updated January 23, 2020. It was originally published January 23, 2020.