How to Invest Your Money: Our Beginner's Guide
Learning how to make financial decisions and investing money might seem, to many, unachievable and scary but it is actually easier than you think. Investing your money is actually the most reliable way to build financial freedom and create wealth over time. This is why you see many millionaires and billionaires having different portfolios, because money ends up working for you in the long run!
There are several different ways to invest your money, and it is up to you to decide which method works the best and how it fits your lifestyle. Some people might look to invest long-term compared to handling invested assets for a short period.
Before getting into our guide, take a look at some of the different ways you can invest your money.
Deciding What to Start Investing in
Evidently, there are many approaches when looking to make an investment in the stock market. That being said, you are not limited as to what assets you can purchase. It is important to understand the underlying security in which you are putting your money in. Setting investment goals and deciding whether you're in it for the long run is something that will help you manage your portfolio.
- Stock exchange-traded funds. Exchange-traded funds or ETFs buy many individual stocks to track an underlying index, such as the S&P 500, Dow Jones Industries and Nasdaq. Buying an ETF allows you to buy stocks from a broad selection of companies in a specific sector or stock index. ETFs are traded on exchanges, similar to individual stocks but allow investors to diversify their portfolio.
- Stock mutual funds. Mutual funds allow investors to limit risk by letting you purchase a piece of multiple different stocks in one single transaction. These mutual funds have managers that pick different stocks to try to beat benchmark indexes. Index funds and ETFs are a kind of mutual fund that tracks an index. The profits come from dividends, interest income and capital gains.
- Individual Stocks. Typically, individual stocks are the most common type of investment. This might be for the people that enjoy keeping up to date with the economical landscape. Stocks can be purchased at a fraction of a price or at large quantities. Shares are traded relative to the company's market valuation.
There are several different ways to decide what kind of investor you are. If you are interested in making the decisions on your own, you can open up an investment/trading account under your name, versus if see stock trading as a long-term investment, you can leave your money to a financial advisor.
There is no right or wrong way to invest in the stock market! Some people might find it easier to sit on their computers everyday and trade compared to some risk-averse people that would rather let their money grow over time.
Potentially the most important concept that new traders must learn, risk management can save you from a massive headache after blowing up your account. It is essentially the process of analyzing and identifying potential risks and knowing when to take profits in any type of investment. It also involves accepting possible losses and mitigating uncertainty in decisions.
Carrying risk has a bad connotation but in the stock world, it is necessary to reach desirable gains. Generally, investments are compared to market benchmarks as risk is defined as.a deviation from that expected growth rate.
The principle of accepting greater risk comes with the form of increased volatility. Volatility changes amongst different underlying investors, and it is up to the investor to decide how much risk to take.
Remember that taking greater risks can reap greater rewards, but it is important to reduce risk when necessary.
How to Invest in Stocks
Getting started in investing your money in the stock market requires you to own an investment account. For those that would rather invest for themselves, you can open up a trading account through an online brokerage. Rather, if you would like to get someone to invest your money for you, look towards hiring a financial advisor or a robo-advisor.
- Opening a brokerage account. Online brokers allow an everyday individual to buy and sell stocks, funds and other securities. Broker also allow you to invest for the long-run through individual retirement accounts. This lets you be in direct control of your investments
- Hiring a financial advisor. Although costly, financial advisors provide financial advice and guidance. Financial advisors can help manage risk and build a financial plan to work towards goals and desired wealth. Essentially financial advisors make their money through flat annual fees, a cut in percentage from the assets they manage or a per-trade fee.
- Opening a robo-advisor account. Robo-advisors allow investors to manage assets without much overview. They are an inexpensive way to invest in stocks without having to worrying about making your own research. The fees for opening a robo-advisior account are minimal compared to a financial advisor and you also do not have the opportunity to ask a human in realtime questions and guidance.
Take note that fees are inevitable no matter the method you choose. it is important to keep track of all fee expenses as they tend too add up over time. Feel free to ask customer service representatives questions regarding advise on the fees that could occur while using their respective services
How to Invest Long Term
Some brokerages allow you to open up retirement accounts. There are several different account types which allow you to invest in stocks. Some accounts are exclusively available only to your employer.
- Retirement accounts. Individual retirement accounts (IRAs) and 401ks are the two most common types of retirement accounts. 401(k)s are available only to an employer while IRAs can be opened up by anything through an online brokerage or a robo-advisor. These accounts are tax-friendly and offer certain advantages that other investments account do not. However, these types of accounts have annual contribution limits and follow an income criteria. Other accounts include 401(b)s, SEP-IRAs and solo 401(k)s.
- Taxable investment accounts. The next option is to open up a retirement account that does not include tax benefits. Gains from stocks are taxed at the capital gains tax rate. These carry no contribution limits but receive no tax incentives.
- Education savings account. Whether you are saving for college or for your children's college fund, an education savings account allows you to invest in stocks with a date targeted. Different accounts include the 529 plan.
As mentioned, investment accounts can be made through a broker (financial advisor or an online one), a bank (ESAs) or through your employers (401(k)s).
Why Should I Invest?
When it comes to living a life of financial freedom and becoming rich, everyone will have their own interpretation. However, the secret of the 1% is that they never really have to work for the rest of their life if they chose to. The money works for them and their families. They have created generational wealth and this is the because of the magical concept known as compounding. You may have been taught the power of compounding through boring lecturers, but the principle is simple: the returns that you earn on money can be compounded, and that money will provide returns.
In this picture, the initial investment is $300 with 3% interest per month. The thing I want you to remember is that everything made from interest is added to the initial investment and will receive a 3% interest on top of that. The first column shows simple interest, which is interest that isn't built from the previous amount and the second column shows how much you would make from compounded interest. You can see that over time the amount exponentially grows significantly more. That being said, your investments will compound over time and help you see a healthy return, given you are managing a safe portfolio.
Funding Your Account
New investors getting into the stock market might wonder how much is needed to start off with to make a significant return. This is somewhat an arbitrary question as a bigger portfolio compounds a bigger treater over time.
While there isn't an exact amount required to start investing, it is recommended to carry an account value that doesn't leave you worrying about the risk you take from positions. For new investors, a single stock should not necessarily hold 100% of your portfolio as a giant drop in value could destroy your account. While it is important to diversify, it is more important to know what you are holding on too.
- Commissions. Some brokerages charge a trading commission for options, stocks, or OTC pink slips, which are typically a fraction of the cost of the actual security. These commissions are charged on the purchase and the sale of the stock.
Retirement accounts also carry contribution limits which vary year-by-year. For an IRA account, the 2020 contribution limit is $6,000 for anyone under 50 and $7,000 for those that are the age 50 or older.
Once you have opened up your trading account, you are ready to begin investing your money to get a good return. Keep educating yourself and learn how the market works. The education you can find on the internet is endless and free. Many successful traders are not made overnight as some have spent years learning the craft to understand price action and a trading strategy that agrees to the person's lifestyle.
As you work on building your account, understand that this is a game of probability. You are not going to win every trade, so it is important to preserve your capital by accepting losses. Market volatility can lead many confused as the market struggles to pick a general direction. During uncertain times, it is wise to perform check-ups on positions and to collect profits when they meet your planned return.
Checking portfolios is not reserved to daily maintenance. Life is not all about trading, the market will be the tomorrow and the day after. That being said, opportunities are missed but that does not mean that there will not be another one.