The basic principles of finance include managing debt, planning, budgeting, and saving. Investing is one of the principle of finance that can be used to meet both short and long-term financial goals. However, for the average person, the idea of investing money can seem complex and complicated. Different investments and investment terms such as equity, liquidity, or real rate of return can be somewhat confusing to novice investors. In most cases, understanding the terminology and conducting research is the best way to begin investing.
Types of Investments
There are many ways a potential investor can begin investing. There are several types of investment options that include real estate, stocks, bonds, and mutual funds. Many novice investors put money into bonds. A bond is an investment option that comes from a government or corporate company. This type of investment is basically a loan than gains interest. The investor lends the company money with the promise of interest on the initial investment. Bonds are one of the more secure types of investment; however, bonds offer very little return.
Another investment option consists of purchasing stocks. However, this type of investment has a higher rate of loss. This is primarily due to the fact that stocks are a form of equity. Experienced investors suggest that beginner investors should try and learn about the basics of stocks prior to spending money purchasing stocks. Buying stock allows the investor to become a part owner in the business in which the investment is made. The profits from the initial investment are referred to as dividends. For many investors, the instability of the stock market and the fluctuation of value is a cause for concern.
One way investors defend against the volatility of the stock market is to invest in mutual funds. Mutual funds are a set of stocks and bonds that are purchased by a group of investors. These investors then hire a professional money manager to choose specific investment options. Mutual funds may include different investment options such as industrial bonds, large stocks, corporate bonds, small stocks, and more. Mutual funds are an ideal method for learning the basics of stocks without the risk of losing money and finances.
Developing A Portfolio
Many experienced investors have developed a portfolio. A portfolio includes the investment assets of the investor. The portfolio can include assets such as real estate, stocks, cash, bonds, mutual funds, precious metals, and certificate of deposits (CDs). When developing a portfolio, there are aggressive and conservative investing strategies. Aggressive investing generally offers higher returns. These types of investors have more equities in the portfolio. Conservative investors, on the other hand, have more fixed-income options. In most cases, conservative investors attempt to sustain the true value of the portfolio.
After gaining experience, many investors begin diversifying. This process offers protection for finances and investment options against volatility. Diversifying a portfolio basically mix and match different investment options. Diverse portfolios retain value much longer than portfolios that include only or two investment options. This process simply places finances into different options. Diversification also creates a strong foundation for compounding interest over a period of time. Compounding interest is a key aspect of investing. Investors reinvest profits from an initial investment in the hopes of gaining more interest. This process can continue indefinitely until the portfolio is robust.
Discount Brokers vs. Full-Service
One of the first steps to begin investing is to build a portfolio and open a brokerage account. This type of account can allow an investor to buy stocks, bonds, and mutual funds. A brokerage account also manages other investments by allowing professionals to buy or sell items on behalf of the investor. In most cases, the professional receives a fee known as a "commission." This fee can range from ten dollars to more than a couple hundred dollars. The fee can vary significantly depending on whether a discount broker or full-service broker is used.
Discount brokers are generally firms that are useful for a self-motivated investor. This type of broker does not offer advice on where money should be invested. Discount brokers leave the financial decisions to the investor and are not as expensive as full-service brokers. Full-service brokers offer a wide range of services. In most cases, the expertise of the professionals and the high-quality service has a high price tag. These types of brokers act as money managers and provide advice on which investments are suitable for the individual investor.
Opening A Brokerage Account
When opening a new brokerage account, the minimum investment varies significantly. However, the minimum can range from $500-$1,000. This figure is considerably lower for education accounts, IRA's, and other retirement accounts. Popular discount brokers include Scottrade, E-Trade, Charles Schwab, and T.D. Ameritrade. These discount brokers offer commissions that range from $10-$30. Additionally, this brokers offer web sites that are easy to use and navigate. These brokers allow investors to invest in mutual funds and common stocks. Mutual funds are ideal for novice investors because this type of investment option is managed by professional money managers. For example, if an investor wants to invest in energy and oil, but is not certain which stocks to purchase, the investor can purchase a mutual fund that deals directly with these types of companies. After the investor purchases shares in the mutual fund, the professional money manager researches different options.
After the account is opened, the investor can begin investing. Brokerage firms provide an option to set up automatic monthly deposits. This feature transfers a specified amount monthly from a savings or checking account into the brokerage account. This provides a simple way to begin building equity.
Overall
Investing does not have to be a complicated process. More importantly, investing is not just for people with extra money. It is important to remember that the earlier investors begin investing, the more interest they can compound. In most cases, a small investment today can offer huge rewards 30 years from now. Any investor that is serious about investing should develop a clear plan and understand their specific goals. The investor needs to realize what goals can be accomplished in five years, ten years, and even thirty years. A solid investment plan can help investors reach financial freedom.
