Investing is essentially trading your money today with the expectation of receiving more money in the future. In this investing 101 guide, we’ll be going over the basics to get started as an investor.
Risk and Reward
As with all things in life, there are no guarantees in investing. All investments have a certain amount of risk associated with it where you could potentially lose some or all your money. Not all investments are the same, as some are considered riskier than others. As a reward for making riskier investments, investors expect a higher return as compensation. Depending on their risk tolerance and financial situation, investors decide what type of investment they are most comfortable making with the right balance between risk and reward.
How much to invest
One question that investors commonly ask is how much should they invest. While there isn’t a one size fits all percentage that should be followed, anywhere between 10 and 15% of your annual income is usually a safe bet. Of course, you can always invest more if you’re willing to accept the added risks. A golden rule of investing to always follow is: “Only invest what you can afford to lose”.
Types of Investments
There are many different types of investments that can help you achieve your financial goals, each with its own benefits and drawbacks.
Stocks
Stocks are some of the most popular investments and they represent a small share of a specific corporation. By purchasing stocks, you become one of the owners of a corporation. As a result, you may benefit financially from its success or lose money from its failure.
Bonds
A bond is a loan that you make to a corporation, government, or other organization. In return for the loan, you will earn interest payments in addition to the bond’s value over a specific time period.
Mutual Funds
Mutual funds provide investors with a simple way to invest in a diverse allocation of assets by pooling their money together. With mutual funds, obtaining a diversified portfolio is made easy for investors with very low fees. Some mutual funds also follow certain indexes such as the S&P 500 with automatically invests your money in the 500 largest publicly traded corporations in the U.S.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are similar to mutual funds since they contain an assortment of investments. However, they are also traded just like stocks meaning their value is constantly changing throughout the trading day. ETFs also typically have lower fees than other types of investments.