If you’ve been paying attention to the stock market at all in the last year, you are likely aware that retail investing is booming. Maybe you have even noticed some of your friends or family members who never seemed interested in investing have recently started buying and selling securities and options.
It is only natural to be curious about how to start investing when you hear so many stories about people making huge gains in a short amount of time.
The truth is, though, that the greater potential rewards of most investments the greater risk you are taking on. For this reason, it is good to be cautious when you’re making your first investment.
Investing can be a wonderful thing to do, but it is important to do so wisely when you are just getting started. Let’s take a look at how to make your first investment so that your money is working for you and not against you.
Investing For Beginners: Questions to Ask Before Making Your First Investment
Making your first investment can be very exciting, but it’s important to ask yourself certain questions before you do so.
First, do you have an emergency fund? An emergency fund is a financial cushion that can help buffer you from unexpected expenses.
Initially, it is good to have at least $500 for an emergency fund. However, over time it is best to have 3 to 6 months’ worth of expenses saved for a rainy day.
Second, do you have any high-interest debt? Holding high-interest debt can both make it difficult to save money as well as negate the earnings you could make from your investments. It is possible to pay off debt and save for retirement at the same time, but you will want to be mindful of the debt you are carrying.
Third, you’ll want to ask whether or not you have an investment account. For many types of investments, you will need some kind of investment account. There are tax advantages to certain types of accounts if you are planning on saving for retirement, like IRA, Roth IRA, or a 401(k).
How to Start Investing
There are lots of different ways that you can invest your money. When you are asking yourself “what should I invest in?” it’s good to first take a look at your specific circumstance so you can make the best decisions for your own financial situation.
Determine Your Investing Style
Not all styles of investing are created equal. There are two major camps when it comes to how you can invest your money. These are active investing and passive investing.
Active investing means that you are constructing and maintaining your own portfolio after having taken the time to do your own research. If it is your plan to use an online broker to buy and sell individual stocks, this is active investing. You will need three things in order to be successful as an active investor, which are time, knowledge, and desire.
As far as time goes, you will need to invest quite a bit of time into learning about the market, researching investment opportunities, conducting analysis, and keeping an eye on your portfolio.
Perhaps the most important thing you will need in order to be a successful active investor is knowledge. Learning how to properly research stocks and analyze investments is something that is going to take time and determination. Before you start investing in an active way, you will need to at least learn the basics.
Lastly, many people simply don’t have the desire to pour hours of their time into their investments. If you don’t have the desire to be an active investor, then you should look into passive investing.
Passive investing, on the other hand, requires much less effort on your part. This involves putting your money in investment vehicles where someone else is responsible for doing all the hard work.
Active investing comes along with more risk, more work, and more potential rewards. Passive investing is more stable, predictable, and simple, but you can only expect moderate returns.
Determine Your Investing Budget
After you have determined the style of investing that is best for you, you’ll want to look into how much money you have to invest. As mentioned previously, you’ll want to have an emergency fund before you start putting money into the market or other investments. If you don’t, you could find yourself in the position of being forced to sell your investments if unexpected expenses arise.
Also, it can be a good idea to deal with high-interest debt before you begin your investing journey. You might consider consolidating your debt with personal loans or a zero APR balance transfer card if you have your mind set on starting investing right away.
Ultimately, you can start investing with any amount of money. However, it’s very important to make sure that you are financially ready to invest before you make your first investment.
Determine Your Risk Tolerance
Next, you will want to look into your risk tolerance. This is essentially how much money you can tolerate losing if things go awry.
Most types of investments come along with some form of risk. Typically, although not always, this risk is related to potential returns.
Other forces that can impact the rate of return include the amount of work involved and whether or not you are able to use leverage. For example, estate can be low risk (since people need places to live and run businesses), but it can involve a great deal of work and allows the use of leverage. Thus, on average, it tends to pay a higher return.
Or, you can invest in bonds and take on very little risk but you also won’t make very high returns. Similarly, you can keep your money in a savings account which comes with even lower risk, but an even lower reward.
While certain investment vehicles might boast the potential to make you ridiculously rich, you’ll want to consider the degree of risk involved and how they fit into your lifestyle.
It’s important to understand that some securities in the stock market carry a lot more risk than others. For example, people can make money playing penny stocks but this comes along with a hefty risk, and plenty of people lose money too. More established “mega-cap”s like Apple might not have as much risk, but they also aren’t nearly as volatile so the potential reward may not be as high.
What Are the Different Types of Investments?
There are a lot of different ways that you can invest your money. Some common types of investments include:
- Mutual fund
- Index funds
- Exchange-traded funds (ETFs)
- Investment funds
- Bank products
- Commodity futures
- Security futures
- Real estate
Inside of all of these types of investments is a whole world of knowledge that will seem impossibly complicated at first. For this reason, it can make sense to start with more straightforward options.
One potential option for investing for beginners is your 401(k). While there are several notable downsides to 401Ks, one benefit of them is that employers often provide matching contributions. It’s important to understand that money in a 401(k) can’t be accessed until retirement without a penalty.
An index fund is another easy option for getting started. These can offer diversity to your portfolio and are typically cheaper to own than actively managed mutual funds. By cheaper, I mean that the people who manage them charge low fees, so they won’t eat away at your returns.
Another option is a robo-advisor. These are algorithm-driven and automated financial planning services that can help you build your portfolio.
A target-date mutual fund is another beginner investment option. While they come with relatively large costs, they exist to help maximize your profits with your specific retirement date in mind. This form of investing will help you compose a portfolio largely of stocks when retirement is decades away and will transition to lower-risk investments as retirement draws closer.
Your First Investment…And Beyond
Investing can be a wonderful way to save up for retirement or make some passive income. Some people even make buying and selling securities in the stock market their full-time job.
However, it is best to begin with a cautious position when you make your first investment. Over time you can learn more about investing and begin to take on bigger risks for more potential gains. As a beginner though, it is better to stick with simple investments vehicles that have moderate to low risk.
Don’t let the fear of missing out drive you to make risky investment decisions you don’t fully understand. Instead, take it slow as you get started so that you don’t watch your savings disappear before your eyes.
As you grow into a savvy investor, you can easily diversify into more exciting and lucrative options.
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