Investing is a way to grow your savings. When you invest, you use your money to buy an asset that will earn income and become more valuable over time. Basically, you're putting your savings to work so that they'll grow and earn your more money. Investing is often the key to reaching your long-term financial goals like putting your children through college, increasing your annual income, and having enough money for your retirement.
The main difference between investing and regular saving is that when you invest, there is a chance that you could lose money. When you save money, like in a bank account, there's no chance of losing anything. In exchange for their extra risk, investments typically earn much more per year than what you'd earn in a bank account.
To make sure you don't get in trouble with your investments, you need to understand what you're doing first. If you rush into something without knowing what you're buying, there's a greater chance that you could lose money. At GET.com, we've put together a beginner's guide for everything you need to know about investing. This information will give you a good head start towards becoming a successful investor.
Types Of Investments
Investing is a pretty broad term. It can really apply to any situation where you put your money towards a project that will hopefully make you a profit but could also lose money. That being said, there are a few common types of investments that most people use.
Stocks: If you ever turn on the financial news, you'll hear them talk about the stock market. That's because stocks are one of the most popular investments. When you buy a stock, you are buying a partial ownership share of a company. If the company does well, you'll make money off your stocks in a couple ways. First, when a company makes a profit, it has the option of sending shareholders a check for their share of the earnings, known as a dividend payment. In addition, if a company performs well and grows its earning potential, its share price will go up so you can eventually sell your shares on the stock market for a profit.
Stocks are relatively risky investments, meaning there is a good chance you can lose money in the short-term. If you watch the financial news, you can see that prices go up and down every day which can be a little stressful to watch. However, stocks have historically one of the highest returns out of all investments, meaning over time you'd likely earn more with stocks than with safer options.
Bonds: When you buy a bond, you are making a loan to an organization. Companies and governments sell bonds to raise money. When you buy a bond, you agree the let the company have your money for a set number of years. Every year they will pay you interest. At the end of the bond, they will pay you your money back. For example, you buy a $10,000 bond that will last for 10 years and pays 5% interest. Every year you will receive $500 in interest payments and after 10 years you will receive your $10,000 back.
If you'd like your money back before the bond repayment date, you can sell your bond to another investor. You might receive more or less than what you paid for it depending on market conditions at the time.
Bonds are a much safer investment than stocks because they give you scheduled payments. However, they are not completely risk-free because if the organization doesn't have enough money, they might not be able to make your scheduled interest payments. In extreme situations when the organization that sold you the bond goes bankrupt, you could lose your entire deposit as well.
Mutual funds: A mutual fund combines your money with many other small investors. The company managing the mutual fund takes this money to build a large investment portfolio of different stocks, bonds, and other assets. Buying into a mutual fund is an easy and effective way to invest. The mutual fund manager is in charge of building the portfolio and handling all the investment decisions.
This saves you a lot of work while having your money professionally managed. It also gives you access to investment options than you might not be able to afford on your own. If you only have a small amount of money, you couldn't afford to buy a large number of stocks individually but you could buy into a mutual fund that offers that variety. In exchange for these benefits, mutual funds charge a management fee that is taken out of the fund's annual earnings.
Real estate: Real estate is another popular investment. Just owning your own home can be considered a type of investment because hopefully over time it becomes more valuable so you can eventually sell for a profit. If you have more money, you can buy an investment property. You could rent it out to make short-term income and then eventually sell the property for a gain, especially if you make renovations and other improvements.
Real estate investing is fairly risky because you need to spend so much money to just buy one property. However, done well real estate investing can also be extremely profitable. Many people like real estate because it's something they already understand; it doesn't require the same technical knowledge as stocks. If you don't have enough money to buy an investment property, you could also invest in a REIT. This is a type of investment fund that combines the funds of many investors to build a portfolio of real estate. It's like a mutual fund for real estate.
Benefits Of Investing
Good returns: Investing offers a much better return on your money than a bank account, especially if you make profitable investments. Most bank accounts pay practically no interest so you don't earn anything by keeping your savings in the bank. Depending on what you invest in, you should earn somewhere between 5 to 10% a year. To put that in perspective, if you earn a 7% return, you'll double your savings roughly every 10 years.
Inflation protection: Prices go up over time, as I'm sure you notice whenever you go to the store. This is known as inflation. If you keep your money in the bank, it won't grow which means over time, the purchasing power of your savings has gone done. By staying in the same position, you end up poorer because of inflation. Investments grow more quickly than the rate of inflation which helps you keep up with rising costs.
Grow your income: Most investments earn some type of income. As you grow the amount of money you have in investments, the amount of investment income you'll earn ever year will grow as well. Hopefully, over time your portfolio will grow large enough so that your investment income can replace your work income.
Support projects you like: Another benefit of investing is that you decide where you want your money to go. If you like a company's product, you can buy their stock which gives them more money to expand. If you want to improve a neighborhood in your community, you can buy and renovate investment properties.
How To Make An Investment
To buy most of the investments in our guide, you need to set up a brokerage account. This is an account with a financial institution that manages investments. To buy and sell stocks, bonds, mutual funds, etc. you need to handle the transaction through a broker. They will take your orders to buy or sell and handle them through the appropriate markets.
To open a brokerage account, you need to deposit money with one of these institutions. Then, with your account they will show you what investments they offer. Most brokers offer an online platform that let you see what investments are available, place orders, track the performance of your portfolio, and find research for future investments.
The only exception to this process is if you want to invest directly in real estate. This is the same as buying your own house where you need to find a property with a real estate agent and then finance the purchase with a mortgage. All the other investments, including REITs, are handled through a broker.
Questions To Ask Before Making An Investment
Any time you are considering an investment, you should ask yourself a few questions beforehand. This will help you make sure the investment you're considering is appropriate.
What is your timeline for investing? The longer you have to invest, the more chances you can take because you'll have more time to make up any losses. If you're investing for a long-term goal that's many years away, it makes more sense to buy riskier but more profitable assets like stocks and real estate. However, if you will need the money in a few years, like if you're getting close to retirement, it's better to be safe because you'd have less time to make up losses.
How comfortable are you with risk? Not everyone is comfortable with risk. If the thought of losing money really scares you, you may want to think twice about investing in riskier assets. If people are not comfortable with risk, they tend to get scared and sell an investment the second it loses money. This puts them in a really bad position because they both lost money and are not in a position to make anything back from a market rebound. If you're worried about making this mistake, it's better to stick with safer investments and try to save more so you can make up for the lower, average returns.
How much do you know about the investment? Not all investments are good investments. To sort out the good from the bad, it helps to stick with areas that you already know well. For example, if you are a computer programmer, you might be good at analyzing technology stocks. If you're a real estate agent, you likely have a good feel for investment properties.
If you're unsure about an investment, it'd be a good idea to speak with a financial advisor first. This way you can get some professional advice before moving your savings into an investment.
What is your plan for the investment? When you buy an investment, you need to have a plan for what you'll do with it. Some of the points to consider include: how long do you want to hold it, at what price do you want to sell, at what point would it be a bad investment that you need to sell? By going in with a plan, you can make logical decisions that improve your profit margin. Without a plan, it's easy to get caught up in emotions and buy or sell at the wrong time.