Investing for beginners, my guess you’ve little to no knowledge about investing but want to learn more about it, and how to invest your money, then this post is for you.
For those of you who may not know anything about finance or financial terminology, I’ll explain a few terms and then give you some steps and great ways to invest your money today.
Table of Content
- What are the key components of investing for beginners?
- How do you go about finding the right investment?
- What are the risks and rewards involved in investing?
- What are some of the best ways to protect your investment?
- What are some of the best ways to make money from your investments?
- Conclusion ( Investing for beginners )
What are the key components of investing for beginners?
Before you consider investing, take a look at your finances and I recommend you follow these steps.
Step one: open a retirement account and start your retirement as early as possible. Personally, I opened my account when I was 20. There are several types of retirement accounts in the US. The most popular are 401k and Roth IRA.
Step two: an emergency fund. I talked about this in one of my other financial posts, but this is just a good rule of thumb.
You never know what’ll happen if you need some money in case you lose your job.
It’s recommended that you set aside at least three months of money for emergencies.
Step three: pay off debts It’s very important that you pay off your debts as soon as possible, because this will set you back in the long run, and if you’ve debts with high-interest rates, you should get rid of them before making big investments…
How do you go about finding the right investment?
If you don’t know what stocks, bonds, and the stock market are, let’s talk about them.
The stock market is the marketplace for stocks and the place where stocks are held.
It shows all the different company shares and how they’re performing overall.
Generally, investor’s emotions have a huge effect on the stock market.
A bond is a contract with a company or government to whom you lend your money and who pays it back with interest.
Stock is an investment that represents a share in a company. you can buy a stock of XYZ which means you basically own a little piece of XYZ. Image a big old pie and as that company grows your stock is going to grow slowly with XYZ.
Mutual funds are collections of stocks and bonds.
There are different types of funds such as index funds and mutual funds.
Mutual funds are collections of stocks and bonds that are managed by an investor who’s knowledgeable about the stock market and uses his or her knowledge of the market to select specific stocks or bonds.
Index funds are a portfolio of certain investments that you can buy into and then own a small stake in a whole bunch of different stocks and companies.
an index is a representative sample of the stock market and is thus similar to a mutual fund, but managed passively by a formula rather than by a manager.
What are the risks and rewards involved in investing?
Risk vs. reward: more risk means higher reward.
Also, lower-risk investments mean lower rewards.
When you invest, you make decisions about what to do with your financial assets. A risk is any uncertainty about your investments that can negatively affect your financial well-being.
Market fluctuations can be also disconcerting for some investors.
The price of a stock may affect by factors internal to the company,
such as a defective product, or by events beyond the company’s control, such as political or market events.
Another hidden risk is inflation, a general upward movement of prices. Inflation reduces purchasing power, which is a risk for investors who receive a fixed interest rate. The main concern for individuals investing in cash equivalents is that inflation will reduce returns.
During a recession, such as we’ve now, changes in interest rates, for example, can affect the value of a bond. If bonds are held to maturity, the investor receives the face value plus interest. If the bond is sold before maturity, it may be worth more or less than the face value
Rising interest rates make newly issued bonds more attractive to investors because newer bonds have a higher interest rate than older bonds. To sell an older bond with a lower interest rate, you may have to sell it at a discount.
What are some of the best ways to protect your investment?
With any investment, there’s some risk, as you’ve all heard about diversification.
Any strategy that we as investors try to use to reduce the impact of a market crash on our portfolio could go under the
banner of diversification, and that brings us back to the question of diversification.
you would expect that are quite passive in their approach and then we have some more complicated strategies that require you
to be a little bit more active.
Let’s start today with the more complicated ones.
Options (Investing for beginners)
Through the use of Put options and the use of long volatility strategies.
the use of long volatility and puts in a portfolio acts as a kind of insurance for that portfolio.
What I mean by that’s that insurance in the normal world, like an insurance for your car or your house, is just dead money that you spend every month and for which you see no real benefit until the point when something happens.
the problem with these financial instruments is that they’re complicated and access is limited for small investors like us.
Diversification (Investing for beginners)
The idea of diversification is to reduce the magnitude of the drawdown. or the severity by reducing volatility within the portfolio and smoothing things out so that the path to growth is smoother.
As investors, we look for something to go up in value while stocks go down in value.
There are only two ways to avoid the impact of a stock market crash on our portfolios. That’s, we need something that goes up in value when stocks go down to offset it.
The best way to protect your investment is to simply buy the S&P 500 by investing in an index fund or an ETF that tracks that index.
if you put your money in an index fund and just leave it alone. it slowly rides the wave of the stock market, will do the trick.
Index funds on the s&p 500 basically track the top 500 companies.
the goal isn’t to simply deposit money and then take it out in six months and hope it’s grown a lot. The goal is to deposit over years, if not decades, and let it grow over time and then take it out.
What are some of the best ways to make money from your investments?
Within a portfolio, equities are the main driver of long-term returns. The inclusion of diversifiers such as bonds or gold in a portfolio serves to protect the equity position from unforeseen crashes.
another way of saying it’s to reduce volatility within your portfolio, but if we believe as long-term investors that stock prices will predominantly go up over time, why should we care about short-term volatility?
Most investors won’t achieve the average return, no matter how much we say we know the rules and general logic and that they’ll follow them
buy the dip, be greedy when others are fearful
That’s a fact because volatility is literally shaking people out of the market.
So let’s take a look at the different ways to make money from your investments.
The short answer is to Hold Real Assets
What most people don’t understand is that money is just another commodity on the market whose price is determined by supply and demand and many other factors.
One way is to buy Real estate to beat inflation. This means that real estate investors haven’t only beaten inflation, but have profited enormously.
Stock or real estate brings something like rental income.
It’s an active asset that actually provides a service or product.
Why do stocks keep going up?
Because the companies behind them keep growing.
Apple sells a lot more iPhones today than it did 10 years ago.
That’s why they’re worth a lot more today than they were 10 years ago.
When you buy a stock, you are buying a share in a business.
That’s why they are also called shares.
Whenever there is too much cash in the economy, the value of that business grows, so you are
growing together with inflation.
Conclusion ( Investing for beginners )
Knowledge is everything when it comes to investing for beginners, if you follow those rules I’m about to tell you, I’m sure that you are on the right path.
Investing vs. Saving – Poor people focus on saving and rich people focus on investing. Focus on how to make more money so you can invest.
Investing in productive assets – such as stocks and real estate.
Holding Cash is not a good investment – Inflation is the main reason not to do that.
Invest in yourself – keen learning every day, do your own research.
All right, so that’s a lot of advice, a lot of beginners, basic things for you.
A little bit of the mindset, which is also very important, but I hope that can help you get started with investing.
For more beginners stuff please also check my other posts
Stock Investing Strategies and Building Portfolio From Scratch.