There are usually two questions that pop in your head when someone mentions investment- Why and Where. Investing can be a daunting prospect for beginners, with an enormous variety of possible assets to add to a portfolio. Let us answer the two questions one by one-
People are often heard saying “I don’t need to invest, I earn enough.” But this school of thought is wrong. Investments are not only done for earning income but also for multiple other reasons some of which are actually long-term.
Here are some reasons besides earning wealth-
- Save for your retirement
- Meet other financial goals like children’s education etc.
- Save on Taxable Income
- Stay ahead of inflation
- Get higher returns than bank’s savings account
- And of course, increase accumulated wealth
The biggest misconception about investing is that it’s reserved for the rich. That might’ve been true to some extent 10 years ago. But that barrier to entry is gone today, knocked down by companies and services that have made it their mission to make investment options available for everyone, including beginners and those who have just small amounts of money to put to work.
In fact, with so many investments now available to beginners, there’s no excuse to skip out. And that’s good news, because investing is the best way to grow your wealth.
Where to Invest
Now let’s focus on what to do with your wealth, how to invest, where and why. It is true investing intimidates a lot of people. There are a lot of options, and it can be hard to figure out which investments are right for your portfolio.
The first step towards investment is to identify which type of investor you are-
- DIY- “Do-It-Yourself” investing is a more hands-on approach. It requires you to do all of the research yourself. You will also have to keep track of your stocks regularly, which can be time-consuming. On the other hand, it means you have total control over what is in your portfolio. If you prefer to invest yourself, then find a stock broker and open a brokerage account.
- Passive Investor- This “set-it-and-forget-it” approach to investing is for people who don’t have the time or interest to do all the heavy lifting themselves. There are a lot of options out there if you want to hire someone to invest for you. If you’d rather not be too involved in the investing process, then you’ll probably prefer using a ‘robo advisor’. These platforms do all the work for you, once you’ve answered a few questions about your investing goals and how much risk you want to take.
- Mixed- This type is a mix between a DIY and Passive Investor. Hiring a stock advisor or signing up for stock picking services can be a way to pick and choose stock on your own while getting the insight of an expert. You will still need to have your own broker account, but you can leave the time-consuming research to others.
Understanding Investment Options
Once you have that figured out, it is time to understand the investment types available in the market. The different investment options are usually divided on the basis of risk associated with them.
Remember- higher the risk, higher the returns
Here are some investment options available for beginners-
Stock investments represent equity ownership in a publicly traded company. Companies issue stock as part of a capital raising regime which funds the operations of the company. Stock investments have varying growth prospects and are typically analysed based on characteristics such as estimated future earnings and price-to-earnings ratios. Stocks can be classified in various categories. Stocks may also offer dividends adding an income pay-out component to the investment.
When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money. Brokers sell stocks to investors. You can either opt for an online brokerage firm or work face-to-face with a broker.
Bonds are one of the most well-known fixed income products. They can be offered by governments or corporations. They are also issued as part of a company’s capital raising regime. Bonds pay investors interest in the form of coupon payments and offer full principal repayment at maturity. Bonds are typically rated by a credit rating agency which offers insight on their capital structure and ability to make timely payments.
The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be lower risk. There is some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds especially, however, are considered a very safe investment.
MFs are made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors.
Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks companies and other instruments in which to put investors’ money. Fund managers try to beat the market by choosing investments that will increase in value. A passively managed fund simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Some mutual funds invest only in stocks, others only in bonds and some in a mixture of the two.
Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is lesser, though, because the investments are inherently diversified.
An option is a somewhat more complicated way to buy a stock. When you buy an option, you’re purchasing the ability to buy or sell an asset at a certain price at a given time. There are two types of options: call options, for buying assets, and put options, for selling options.
The risk of an option is that the stock will decrease in value. If the stock decreases from its initial price, you lose your money. Options are a highly advanced investing technique, and you must get approval to participate in the options market.
There are many other options also available like-
- Real estate
- Preferred Shares
- Retirement Accounts
- Exchange Traded Funds
- Index Funds
- Retirement Plans
- CDs etc.
Understanding Financial Goals
But before investing, one should lay out their plan for why are they investing which is also the next step. It helps to understand the financial goal now that you have a better understanding different asset.
Short Term Investing
|High liquidity||Low returns|
|Low Risk||Higher tax bills|
If you know you’re going to need the money in a few years, then your strategy is going to be a bit different. Usually, this is when you buy stocks whose earnings are expected to outpace the market as a whole in a short amount of time. This is also known as growth investing. Some of the short-term investing strategies include investing in a peer-to-peer lender or putting your money in a savings account.
Long Term Investing
|Less risky||Requires patience|
|Less stressful||Less control|
This is also known as buy-and-hold investing and is probably the most common investment for things like retirement. You know you’re in it for the long run. This strategy involves buying stocks now and holding them for years when they will hopefully be worth more. Other long-term investing strategies include real estate and investing in a certificate of deposit.
The final step before you can start investing is to allocate the budget available for investments. if you want to become an investor, having a budget can be extremely helpful in saving money to use for investing. When making your budget, be sure to include plenty of funds for investing.
Now, there are plenty of methods for setting up and maintaining a budget. It doesn’t have to be rocket science. You can use a spreadsheet and just paper and a pen. Or you can use one of the helpful online services that do the heavy lifting for you. It’s also a good idea to think about saving money on the side to invest eventually.
Now that you have all these aspects sorted, it is time to get into investing. You might think that now isn’t a good time to invest because of all of the uncertainty around the Corona Virus Pandemic. Instead of thinking about how much value stocks are losing today, think about investing in the long-term. On average, the stock market has a return of 10%. That amount does vary by year and by the type of stock of you invest in, but if you diversify your investments and keep investing, you’re more likely to see a better return on your money then if you didn’t invest.
And as history shows us, stock prices eventually go up after they crash