What is investing?
Investing is a way of putting your money to work for you. You offer money to another entity that uses it for some benefit. In return for your financial resources, the company, organization, individual, or government provides the chance for you to be repaid with more than you put in.
When beginning investing, it’s a good idea to start with the basics. Here are some of the most common types of investments:
- Stocks: You have the chance to buy a small portion of ownership in a company. If that company becomes more valuable, the price of its shares increases. If you decide to sell your stock at that point, you can see solid gains.
- Bonds: With bonds, you lend money to a company, organization, or government. You are supposed to receive the original amount back, plus you receive interest, similar to how you pay interest to a lender when you borrow money.
- Mutual funds: When you invest in mutual funds, you invest in a small portion of everything listed in the fund. Funds are created based on various principles. You can find funds that invest in groups of stocks or bonds with similar characteristics, such as high-growth, participation in a certain sector (such as healthcare or utilities), or company size. It’s also possible to find certain types of mutual funds, called index funds, that focus on investments on a specific index, such as the Dow, S&P 500, or Russell 2000.
There are other types of investments, including real estate, commodities, currencies, and derivatives. But for beginners, it makes sense to start with stocks and bonds, especially if you use our recommended partners.
As you become more comfortable with investing, and as you learn more about different investments and how they work, you can add more to your portfolio.
What about risk of loss?
Whenever you invest, it’s important to understand the risk of loss. Anytime you put your money into an investment, there is a chance you will lose that money.
For instance, with stocks, there is the risk that the company won’t do well. Instead of the share price increasing in value, there is always the chance that it will decrease in value, and you will lose the money you put in.
When it comes to bonds, you run the risk of the company defaulting on its debt. You could lose a portion of your original investment on top of losing your potential future gains.
One of the reasons many beginners choose mutual funds – particularly index funds – is because they can help manage some of the risk. Rather than trying to choose the “right” stock or bond, you invest in a variety. If a few lose ground, it doesn’t completely devastate your portfolio because there are other investments to make up the difference.
Index funds can be particularly attractive to some beginners (and even long-time investing veterans) because they focus on a wider portion of the market. Over time, as the market gains, indexers have a chance of coming out ahead, regardless of what happens with one individual stock or bond.
Understand, though, that there is risk in any course of action you choose. If you decide to keep your money in a “safe” bank account, you won’t earn much interest. In fact, there is a good chance your earnings won’t be enough to allow you to reach financial freedom later on. With the low rate of returns and the impact inflation can have, you might even lose money in real terms if you rely on a savings account instead of investing.
Carefully consider your options and your finances before investing. Think about what kind of risk you can handle and which investments are more likely to meet your goals for the future.
How do I start investing?
It’s possible to start investing with as little as $100 per month when you open an account with our partner Betterment. The key to getting started when you don’t have a lot of money is to use a method called dollar-cost averaging. With this method, you automatically invest a set amount of money each month. Depending on the price, your money will buy more or fewer shares.
You build your portfolio with shares over time, consistently investing. On a long-term basis, this can be a way to automatically take advantage of compounding returns. If you leave your money in your portfolio, you have a good chance of coming out ahead because the stock market hasn’t ever lost in any 25-year period of time. Dollar-cost averaging works best for those who plan to invest in index mutual funds, and who have a small amount of money to start.
As you earn more money, you can increase the amount you invest each month. Also, as you become more comfortable with investing, you can branch out to different types of investments that might better help you reach your goals.
Check out these resources for more information on how to invest:
