For a beginner, investing might on the surface seem easy yet intimidating. Still, it remains one of the best ways of building one’s wealth over a long period of time. Whether you are saving for retirement, you want to buy a house or simply want to cement your financial future, learning the best ways to invest can have you achieving your goals. For the sake of this discussion, all the relatives – in this case the investment relatives – will be considered. This is a beginner’s presentation and therefore we will examine such concepts week.
Why should someone spend time and money on investments?
However, before going into details, we should first discuss a question which possibly lingers in most readers’ minds: Why invest? Some people feel as if the only option they have is sticking cash in a bank account. Given the effect of inflation, this may be the dumbest idea to a reasonable situation. This means that with time, that sum of money will buy you much less than at present.
In addition, investing ensures that your money does not simply sit and lose buying power due to inflation since you are making more than what the inflation rate is. This applies to all people intending to increase their living standards through the purchase of durable consumer goods. Thanks to investing, your money will grow at a rate faster than inflation, which means you can have more buying power and create wealth. Strategically investing of sorts can as well earn you some reasonable income in the long run, better whereby the money earns you income rather you earning the money.
Here are some key terms that are worth knowing prior to beginning your investment:
- Risk: Risk is the likelihood of losing your money on an asset. In general, high risk results in high return investments and low risk portfolios yield lower returns but are more secure.
- Diversification: This involves investing different amounts to many assets so as to avoid or reduce risks associated with an asset.
- Return on Investment (ROI): This s the net gain or loss from an investment relative to its cost.
- Compound Interest: Compounded interest is when a person earns interest on money earned; this is done through investment earnings, not only on the original investment.
Types of Investments
There are various forms of investment which you may find worth trying out. Each will have specific levels of risk, rewards and time investments required. Below are a few investment types that a beginner will probably encounter:
Stocks
Stocks are a form of ownership in a company. When you purchase some share of stock, you are purchasing a small portion of the entity in question. Stocks are favorable because they are likely to yield great returns; however, there are more risks involved. Stock market prices tend to change as per the business operates and the economy, hence best for investors who are willing to make long term investments since there are short term shocks.
Bonds
Bonds are a type of liability that you issue to a corporation or a government and these have to pay you back with interest. They can be less risky than stocks since they offer a steady income and have lower price swings during turbulent times. But those have lower returns in general than stock capital.
Mutual Funds
A mutual fund is a method in which several people contribute their money and the total is used to purchase a group of different securities such as equities and debt securities. Now you can invest in a wide range of assets without investing in particular shares or bonds. They are advisable to beginners since they do not have the time to actively manage their investments and yet wish to invest in the stock markets.
Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds in that they contain several different securities however, they can be bought and sold on an exchange like a stock. Investing in this fashion gives the investor more options and at a lower level of expense. Many ETFs are designed to replicate the performance of an index such as the S&P 500, which consists of large US companies.
Real Estate
Real estate investing is the purchase of property meant to make money either through rent or through an increase in value. Investing in real estate could be a good way of reducing risk in your portfolio although this may take more time and money as compared to stock or bonds. Real Estate Investment Trusts are types of funds that enable you to invest in real estate without actually having to own physically houses.
How to get it Started
Most beginners fear the initiation of the investment journey because it seems a bit daunting. To avoid this, you can follow these steps and position yourself for success:
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Set Clear Financial Goals
One of the first things to do before investing is to evaluate the investing objectives. Are you accumulating funds for retirement, buying a house, or do you need to put aside money for emergencies? Your objectives will determine the type of the investment plan you will put into place and the duration.
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Assess Your Risk Tolerance
Risk tolerance is a measure of the level of risk one is willing or prepared to incur. If you are a person who fears the possibility of losing money, you might want to invest in lower-risk options such as bonds and money market accounts. Still, if you are in a position to lose money in pursuit of higher returns, then you could invest in shares of stock or real estate.
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Begin with What You Can Handle
It’s a common myth that one needs a lot of money to invest. In fact, there are many platforms that will offer you to start for as little as $100. So the point is to begin slowly and make regular investments for the long term. If your confidence increases then you can make larger investments.
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Scrutinize and Reduce Risk through Diversification
Diversification is perhaps the most effective risk management technique. The more areas you invest in such as stocks, bonds, real estate etc, the lesser the risks of losing your investment due to one investment gone bad.
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Grow Wealth over a Longer Period of Time
Investing is not a sprint rather a marathon. Fluctuations in the market over the short term often happen but there is more evidence that longer time period growth of markets is more credible. Focus on the long term plan and avoid the careless actions of changing your plan due to the short term victories and losses in the market.
Common Mistakes to Avoid
You cannot consider yourself an experienced investor as a beginner because there are some great mistakes which you will definitely do. This happens because they are not fully aware of a complex investment environment. Moreover, some of these mistakes include the following:
- Market timing: People believe it’s easy to make money in the stock market if one knows when the prices are low or high which is not true even for the veterans. Continue with your plan for the long term instead of trying to make shortcuts through timing markets.
- Not diversifying your assets: Investing in a single stock or asset category is more dangerous. Make it a habit to always seek a diversified portfolio.
- Overreacting to market swings: Some downturns will cause peaks and troughs in the markets but this is a normal behavior. In times of recession, do not sell off your security because you will deal with a loss. Stay put and bear in mind that making investments is for the long haul, but at the expense of a temporary recession.
Conclusion
Making an investment remains to be the most advisable and possible option to increase personal wealth. But it requires a comprehensive understanding of its principles, sufficient patience and a long-term view of time. By knowing basic aspects of making investments, investing in right instruments and avoiding probable traps, you will be able to create a strong foundation for your financial standing. You can begin with little steps and work step by step to have this in mind and you will see that the effects of earning interest will be maximized to the fullest when it is done over time.
