What is an investment? Why do some people find investing easy while you find it a bit complicated? How do investors come up with money to invest? These are just some of the common questions people ask when they start venturing into investments. How easy or difficult is investing anyway? Let’s find out.
Your savings are the most basic form of investment. If you can’t save money, then you cannot invest. Investing is complicated. Many people are hesitant to get started because there is so much (often conflicting) information about investments, so many choices and so many risks. But it doesn’t have to be that way.
Here is a crash course to get you started.
A typical investor
A typical investor has credit card debt under control. It makes no sense investing in stocks, bonds, or mutual funds if you have a lot of credit card debt and an interest rate of more than 10%. You don’t have to be debt free to invest but make sure to pay each debt each month. You also should be paying low interest rates on that debt. A typical investor also has an emergency fund of at least three months’ worth of basic living expenses. And finally, a typical investor has a 401(k) plan so he can maximize his contributions and diversify his investments.
Where to find the money to invest?
Plenty of stock mutual funds allow you to invest with $500 or less. Take advantage of your next bonus, your income tax refund, or your extra cash in your investments. If you can’t come up with at least $500, there are funds which let you skip your initial sum of investment if you sign up for automatic monthly withdrawals of $25 to $50 from your checking account.
How to choose an investment?
The first step is knowing your investment goals. Are you saving for a college fund? Are you saving for a house? Retirement? The type of investment you choose will depend upon the amount of time available before you need the money. Stocks, for example, are long-term investments. It is best to hold stocks or stock mutual funds for more than five years. If you need the money sooner, then reduce your return by cashing in when the value is down.
What is risk tolerance?
If you hide your money in your room because you don’t trust the bank, you probably will not feel comfortable when investing in stocks.
Where do I put my investments?
Most experts recommend spreading your money over different types of investments to reduce risk. This is because investments can go down or up depending on numerous factors. For example, when stock mutual funds or returns on stock are high, chances are returns on bonds will be low. If you have your money in both types of funds, you are likely to get a decent combined return even if one fund takes a downturn.
As a beginner, choose stock mutual funds over stocks in individual companies. This is because stock mutual funds have less risk than an individual stock. If a company does poorly, you will still have a good return but if a stock in one company goes poorly, you’ll lose money.