Investing For Beginners: Five Ways To Get Started
Investing for beginners does not have to be as daunting as you may think it is. You also don’t need to have a lot of money to start. We have all heard about the power of compounding and how investing just $100 a month will yield thousands down the line. In the same respect, not investing leaves thousands of dollars potentially on the table. If you have never invested, here is where you want to start.
Here are five types of stocks that will make investing for beginners less scary
The stock market is where people can invest by buying and selling stocks. When you invest in a stock, you are purchasing shares (small pieces of ownership) of a company. When the company that you invest in does well, you can get paid in two different ways:
- The value of your shares goes up: If the company looks to be going in a good direction, other investors may be willing to shell out more money for your shares than what you originally paid.
- You get paid dividends by the company: If the company is making profits, they distribute part of that profit back to its shareholders. Keep in mind, the smaller the company, the less frequent you would receive any dividends. A small company would typically reinvest that money back into the company.
Investing in stocks is considered a higher risk investment. If the company loses money, your shares go down in value. Because of this volatility, if you decide to invest in stocks, you should plan to do so for the long term.
Bonds, also known as fixed-income assets, are a less risky investment than stocks. With bonds, you are lending your money to the bond issuer (like an I.O.U). The bond issuers are either corporations or governments. With bonds, you can expect a reliable return since bonds pay at fixed intervals and they pay out a fixed amount of interest. You can expect a pay out twice a year.
With bonds, the issuer is legally required to repay their debts so they are considered a safer investment. On the flip side, don’t expect to see the same amount of growth that you would with stock investments. When deciding which types of bonds to invest in, those issued by the U.S. Treasury are less risky than municipal bonds which are issued by state and local governments.
There are tax advantages to investing in these two types of bonds. With municipal bonds, you are not required to pay federal income tax on the interest you earn. For treasury bonds, they are not taxed by states.
If you decide to go the route of investing in corporate bonds, you will find that they are riskier than investing in government bonds. If you want to play it safe with corporate bonds, you want to invest in investment-grade bonds. The riskier corporate bonds are called junk bonds. These bonds yield higher interest rates because they are deemed riskier.
Mutual funds are different from stocks in that they represent a collection of different stocks, bonds and other types of investment assets. These funds are usually managed by financial professionals like Charles Schwab or Fidelity Investments. Then you have what are called index funds which has their performance tied to a market index like the Down Jones Industrial Average or the S&P 500.
People like Investing in a mutual fund because you get a nice cross section of the market without having to do all the research that goes into buying individual stocks. Furthermore, mutual funds are not traded on the stock market. If you want to buy into them, you have to wait till the end of a trading day and purchase through an investment company that manages the fund.
You do need to have money in place in order to start investing in mutual funds. You usually need about $1,000 to $2,500 as an upfront investment.
Exchange-Traded Funds (ETFs)
Exchange-traded funds are like mutual funds in that they are made up of different investment assets. The main difference is ETFs are not being managed by someone. They are passively managed index funds. Their performance is usually mirrored alongside a major stock index or the performance of the overall stock market. Some other ETFs look to mirror a smaller segment of the market. Since these funds are not actively managed by someone, their fees are usually lower than the fees you would get from a mutual fund. In addition, you can trade ETFs throughout the day on stock exchanges and there’s no minimum investment amount.
Certificates of Deposit (CDs)
CDs, or certificates of deposits, is one of the lowest-risk investments you can go with. The bank or financial institution you decide to purchase from will keep your money in exchange for a guaranteed interest rate. The caveat is because these are so low risk, the interest you earn on CDs is very low.
Your Work 401k and IRAs
If your employer offers a 401(k), this is a great way to go when it comes to investing for beginners. Even better if you work for an employer that will match your contribution. This is free money to take advantage of.
There is also the option of opening an individual retirement account like a Roth or traditional IRA if you don’t have access to a 401k. The contributions in a traditional IRA are taken pretax so you are able to deduct them on your tax return. The taxes are taken out when you withdraw the money. On the flip side, with a Roth IRA, your contributions are taxed now but are then able to grow tax-free If you do find yourself opening your own account, we suggest going through a brokerage as you will have more access to a full array of investments.
If you really want to get started with investing but only have a few dollars to contribute, there are micro-investing apps you can explore. E-trade, Acorns and Stash are just a few popular apps that you can get started with as little as $5. Just try and make automatic contributions and you will see some growth over time.
Investing for beginners doesn’t have to be scary
When it comes to investing, you are investing for the long term. The reality is that the market is volatile and can change from day to day. You are going to have days where you may see a scary headline but the last thing you want to do is withdraw your money. The market typically corrects itself over time. The key is to diversify your holdings and stay the course. Investing your money is one of the best things you can do for your finances. You can never go wrong with paying yourself first.