Investing for Beginners: What Is Investing & How Do I Get Started?
Want your money to work harder for you instead of the other way around? Enter basic investing. Investing your money is an excellent way for you to accumulate or build wealth.
And investing isn’t as difficult as you might think. Below, we break down the basics of investing for beginners (from building blocks to investing considerations) and how you can easily get started today.
- Investing involves buying assets, holding assets, and selling assets.
- Consider time, risk, taxes, and comfort levels before investing.
- Choose from four basic investing options: cash and cash equivalents, stocks, bonds, and mutual funds.
- Start investing by creating investment goals, doing your research, and avoiding fear or greed.
Investing includes three building blocks
On a basic level, investing means that your money is going to earn more money for you. You place your money into an investment account with the expectation that it will grow over time.
But before investing, it’s crucial to first understand three investing building blocks. These three building blocks include
- Buying assets
- Holding assets
- Selling assets
Buying assets (hint: an asset is something with current, future, or potential economic value like stocks) involves selecting an investment that you think will grow in value over time and, hopefully, generate money or positive cash flow for you.
Money growth normally only happens if you buy and hold your assets or you don’t sell them. Holding your assets means that interest can do its work and your asset will grow in value.
But what if your asset starts losing value? Or you find another asset that would be a better investment. Or maybe still, the asset is dropping in value very quickly and losing money. In this case, you might sell your assets because your money isn’t working hard enough for you.
Use these three building blocks as the foundation for your investing knowledge and decisions.
Investing requires four considerations
Before investing, you need to follow guidelines to avoid losing money. The following four considerations should guide your investing behavior:
Let’s look at each one.
The first consideration is Time: when will you need the money that you’ve invested? How much time do you need? This is also called your time horizon. Your time horizon dictates what you invest in.
For example, maybe you need the money and earnings from your investment back in 30 years. With this time horizon in mind, you might choose a long-term investment like a target-date fund (a type of retirement account).
Risk means that there’s uncertainty involved with your investments or the potential to lose money. This consideration includes the actual risk of the investment (some investments are riskier than others) and your risk tolerance (aka how much risk you’re comfortable with).
Use the risk vs reward equation to make investment decisions. Investments will be “High risk, high reward,” “Medium risk, medium risk,” or “Low risk, low reward.”
Next, we have Taxes – specifically, Income Taxes. Types of investment income (e.g. dividends from stocks) are taxable when the money is received.
However, if your investment’s value increases (aka appreciation), you won’t owe taxes on this increase until you sell the asset. It’s important to research and know what taxes are required for different investments to avoid accidental tax evasion.
And last but not least, we have Comfort. Also a part of Risk, this consideration means that you have to be comfortable with what you’re investing in. You answer the question: do I understand this investment well enough to buy it? Only you can answer what your comfort level with investing is.
Investing covers four investing options
There are four basic investing options that you can invest in. These four options include
- Cash and cash equivalents
- Mutual funds
Your decision to buy any of these assets depends on the four considerations in the previous section.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents (e.g. checks) are where you deposit money in a financial account such as with your bank and earn interest. They’re a low-risk, low-return investment but are helpful if you need to quickly access cash for emergencies.
Stocks allow you to own a small portion of companies. As certain companies increase in value, their stock prices often go up, along with the value of your investment. Because stock prices can also decrease, stocks are a higher risk, higher return investment.
However, stocks have still proven to outperform all other investments over the long-term. In fact, the stock market has an average return of 7% each year after inflation (aka prices rising over time).
With bonds, you are essentially lending money to companies and local, state, and federal governments for a certain time period. The money that you lend earns interest (typically paid out twice a year).
It’s a low-to-medium risk, medium return option. U.S. Treasury bonds are one example (a bond issued by the federal government).
A mutual fund is a professionally managed fund that pools together money from investors to buy a basket of investments (like stocks). Money is earned through dividends, interest, and gains.
The level of risk and return depends on the type of mutual fund you invest in. For example, stock mutual funds have a higher risk/return than bond mutual funds.
Note: These four investments don’t have to be purchased individually. You can buy more than one type to create your investment portfolio.
Investing for beginners: How to get started
Now that you understand the basics of investing, you can get started with your own investments. Here are the exact steps to take:
1. CREATE INVESTING GOALS
Having investing goals helps you stay focused on your money and achieve long-term financial success.
To create your own investment goals, answer the questions: why do I want to invest? What will I do with the money I earn? Break down your answers into short-term, mid-term, and long-term goals. Here’s one example of a long-term investment goal:
- I want to invest so I can retire at 50 with $2 million.
Write down your goals and keep them in mind as you make investment decisions.
2. DO YOUR RESEARCH
Understand each investment before investing. For example, with stocks, read about the companies that issued the stocks. Learn about their revenue, net income, calculate their Price-earnings ratio, etc.
The same approach applies to other investments like mutual funds. This step will help protect you against bad investment decisions!
3. AVOID FEAR OR GREED
Fear and greed are two of your worst enemies with investing. It’s easy to fall into the trap of quickly selling your investments because of fear that you’re going to lose money.
It’s also just as easy to sink your money into new, risky investments because you think they’ll make you rich.
Keep a level head with investing. Review your goals. Remember why you’re investing in the first place, what you know about your investments, and how much money you have to invest. Don’t allow fear or greed to drive your investment decisions.
Investing for beginners is not complicated
While it does take time to learn, investing shouldn’t be treated as an impossible activity. It’s an excellent tool that helps your money grow. As you buy assets, these assets can 1) grow in value (or appreciate) and 2) generate money or cash flow for you right now or later on.
Want to learn more about investing? Check out Personal Financial Well Being on Udemy. Section 6 and Section 7 are all about investing and guide you through the ins and out of accumulating wealth. And, if you use our link, you’ll receive a discount. Happy investing!