How To Start Investing: A Beginner’s Guide

Key Takeaways

  • Investing refers to the act of paying out money today, in order to earn more money in the future.
  • Beginners have many investing options to choose from, such as stocks, bonds and real estate.
  • When learning how to start investing, it is important to define your goals and criteria.

There is never a bad time to start investing, no matter your age. Low-cost, user-friendly investment applications have increased rapidly in the financial market, making it easier than ever for anyone to invest. In the likelihood that you’ve never taken an intro to investing class, however, you still may be wondering “where should I begin,” and “what should be my first step?” Look no further! Below you will find a guide on how to start investing, where you’ll be introduced to different types of investments, how to start investing money, and what to do when you don’t have much to start out with.

Investing For Beginners

Investing refers to the act of paying out money today, with the intention of earning more money back in the future. Many get into the habit of investing as they become conscious about things like saving up for retirement or achieving financial independence.

Those who keep their money in a standard savings account will typically see an annual return of less than one percent. The resulting gains are arguably negligible, even over a long period of time. In contrast, NerdWallet reports that the stock market offers an average of six to seven percent in annual returns. For individuals who wish to put their money to work, investing becomes the more attractive option. This next section discusses just how investors grow their money in various types of investments. This next section discussed exactly how investors can use various types of investments to grow their incomes and get close to achieving financial freedom.

Types Of Investments

Any type of strategy to grow money or asset value over time is considered an investment. Investing is often associated with the stock market, when—in reality—it entails so much more. The following are different types of investments for beginners to consider. Keep reading to obtain an overview of each investment type, as well as some pros and cons of each.

  • Stocks
  • Bonds
  • Cash Equivalents
  • Gold
  • Annuities
  • Real Estate

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Stocks

Stocks, typically referring to common stocks, represent shares of companies that members of the public can purchase. The value of these stocks increase or decrease based on the ebbs and flows of the economy and corporate performance. Stock investors earn money by receiving dividend payments from company profits, or by selling stocks when prices increase.

Many investors enjoy the flexibility that the stock market offers. Some take a passive approach by holding onto stocks for long-term gains, while others actively trade their shares on the market. However, stockholders face risks associated with the volatility of the market. Economic fluctuations can cause the value of shares to soar and plummet, even on a daily basis. Investors must be prepared to face this irregularity in order to realize returns in the long run. For more on stocks, visit this article that examines the debate on investing in real estate vs the stock market.

Bonds

Bonds are a tool used by the federal government and companies to solicit financing. You can almost think of them as the government’s way of crowdsourcing funds from the public. Those who purchase bonds have the promise of being paid back with interest, with the time frame and interest rate determined beforehand.

Bonds are considered low risk, because they represent debt that must be repaid within a set timeframe. In addition, the predetermined maturity date and interest rate allow investors to calculate the exact gains they will make. However, these benefits do not come without tradeoffs. For instance, bonds are known to provide lower gains when compared to other investments, such as real estate, because the returns are impacted by inflation. In addition, bond maturities can last up to 30 years, making it a long wait for investors looking for short-term gains.

Cash Equivalents

Investors who want the high credit quality that bonds offer, but prefer something more short term, might consider cash equivalents. Also known as a money market instrument, cash equivalents represent an asset class that include Treasury bills, certificates of deposit (CDs), commercial paper, marketable securities and short-term government bonds. Investopedia offers an overview of each type of cash equivalent in detail, but in essence, they are tools that the government and companies use to borrow funds on a short-term basis. Returns are typically fixed within short maturity dates, lowering the risk of default. In addition, cash equivalents can be traded freely without time restrictions.

If your objectives are long term in nature, such as building a nest egg for retirement, these low-yield, short-term investments may not be your best option. However, cash equivalents can be great for holding funds temporarily to help prepare for an upcoming expense.

Gold

When someone mentions investing in gold, it might evoke an old-school image of trading gold coins. Investors can still buy gold coins and bars, but today’s gold market offers a diverse range of options. For instance, there are gold exchange traded funds (ETFs), certificates, and futures contracts, all explained in further detail in our investing in gold overview.

Because gold is used in many industries such as fashion and technology, investors enjoy being able to trade their assets easily in a market with global demand. In addition, acquiring a tangible asset, whose value is tied to its physical form, is psychologically reassuring to many. Gold offers a chance to diversify one’s portfolio; however, one should keep in mind that it costs money to store and maintain physical assets such as gold and jewelry. Investors should also keep in mind that gold can be expensive to purchase, and that its only profit source is through appreciation.

Annuities

Annuities offer a great way of saving up for retirement. Individuals typically allocate savings into an annuity account over time, until they reach retirement age. Over the years, the savings grow in value based on the interest rate associated with the product. Upon retiring, the individual receives their investment in the form of a steady income. The size of payments depends on how much has been invested, savings growth, and the schedule of payments.

Anyone who considers annuity investing should spend time researching different products and interest rates. Financial firms typically charge annual fees at a minimum, which will eat into your returns. Finally, withdrawals and payouts from annuity accounts are subject to ordinary income tax, while early withdrawals can be subject to tax penalties.

Real Estate

Investors who wish to have direct control over their investments, and thus their finances, are often attracted to real estate. Real estate is a tangible asset that both appreciates in value over time and can be used to produce income. Because the industry offers a wide range of investment opportunities, real estate owners not only enjoy various tax benefits, but also the option to turn real estate investing into a part-time or full-time career. For instance, some real estate investors make a living in real estate by fixing and flipping properties, while others might own a portfolio of rental properties.

Any type of investment opportunity comes with tradeoffs, and real estate is no exception. However, real estate investors have the opportunity to mitigate their own risk. When investing in stocks, for instance, your success largely hinges on corporate and market performance, which are entirely out of your control. When in investing in real estate, however, you can control the outcome of your investment by minding your due diligence, performing extensive market research, and selecting an exit strategy that makes the most sense. Be sure to keep reading about how real estate sets vs other types of investments to find out if it’s the best option for you.

How To Start Investing

Whether you want to achieve financial freedom or grow your savings account, defining your objectives should be the first step you take before making any type of investment. In addition, you’ll want to think about your criteria such as your threshold for risk, desired return on investment, and the level of control you wish to have.

Determining your financial goals and criteria is the key to selecting an investing strategy that works best for you. Beyond this, the steps to getting started will vary between investment types. For example, if you think you’re interested in buying and trading stocks, there are user-friendly apps and websites that make it easy for beginners to learn the ropes. If real estate is more your calling, a real estate investment program can be a great way to receive proper training so that you can excel in the strategy of your choice.

Finally, cost is an important factor to consider when selecting an investing strategy. The following section explains how much money beginner investors generally need to get started.

How Much Money Do You Need To Start Investing?

Investing startup costs vary greatly based on the type of investment under consideration. For example, the purchase of gold is based upon its current market price, while stock prices are based upon the supply and demand of company shares. On the other hand, annuity investing usually takes the shape of making pre-tax allocations from each paycheck. In general, most types of investments offer a wide range of financing options, making it possible to get started, regardless of your financial standing.

Real estate is commonly misperceived as one of the most expensive investments. This is understandable, since properties are sold for hundreds of thousands (or even millions) of dollars in some markets. However, real estate investors often get their start with little to no money of their own. For starters, real estate is one of the only investment options that allows investors to leverage their capital. This means that buyers can take out loans to finance the purchase of property, by putting down a fraction of the cost. Furthermore, many investors buy real estate without using any money of their own, such as by going through private money and hard money lenders. Knowing this information is a crucial piece to helping beginners get over their hesitation.

Summary

When thinking about how to start investing, the sheer number of options can be overwhelming. However, clearly defining your goals and criteria beforehand will help narrow your focus. Also, if the perceived cost of investing has made you hesitate in the past, now is the perfect time to reconsider. As discussed in the section above, beginners can get started—even with little to money of their own. Today’s investing market offers a wide array of products that accomodate all types of budgets and experience levels. Because it takes time for most investments to grow, time is of the essence. There’s no harm in starting small today, and building your investment portfolio as you gain experience.

What are some of the reasons why you’re interested in investing? Share your story in the comments below:

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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies