For those of us who know nothing about investing, it can seem like a big scary, intimidating, and complex subject. It can scare us off from even starting to learn. As the title of this article implies, this is meant to be a first step for those who have no investing knowledge, and who are maybe a little unsure about how and where to start. The truth is, there is an almost endless amount of things you can learn regarding investing, but the good news is that starting with some basics can give you a good foundation to find out more about what you’re most interested in, and to determine what kind of investor you are.
What’s Investing All About?
Investing is purchasing assets that you expect will go up in value. Basically using money to make money. Just like we know that buying a car isn’t an investment because cars drop in value like rocks. But for example a coin collector will buy rare coins that he or she expects will rise in value. That collector is making an investment in coins. Of course there is risk in all investments to some degree or another. For example, if a coin collector buys a very rare coin, it will probably go up in value. But, if a new stash of that type of coin is discovered, then that coin is not so rare anymore. So it won’t go up in value as much, or it might drop in value. This is the risk associated with investing. You might lose money instead of make money. Or you might make less than you thought. Investors of all types have access to a wide range of investment types. There are investments that are simple and low risk but only earn a small amount (return on investment: ROI). And there are investments that require more knowledge, and are more risky, but they can earn you a larger return. Choosing the right one depends on your comfort level, knowledge and your risk tolerance.
Common Types of Investments
Here I’ll give you a basic overview of the types of investments that I’m familiar with. I’ll start with the less risky/lower return ones and work my way up. Banks often offer high-yield savings accounts, and certificates of deposit (CDs) or GIC (Guaranteed Investment Certificates). Then there are various types of bonds like government savings bonds. Many people invest in real estate (land and buildings) or collectibles like coins, stamps, jewelry, art, baseball cards, etc). Then we get better performing investments like mutual funds, index funds, then stocks (also called equities). These are the investment types that I’m familiar with, they are discussed in greater detail in another article in the Investing section. I don’t want to write about things I know nothing about, so if I’m missing anything important, please feel free to contact me with info so I can update this site.
What Risk Means To You
Some people see risk as an opportunity to make lots of money. Others see it as a chance to lose money. Much of that depends on your level of experience, knowledge and confidence: which only come with time. The other concern is how much time you have until you need the money back. Say for retirement for example. Over the long term, most risky investments turn out to be much less risky. Despite the short term ups and downs of the stock market for example, in the long term the stock market has done very well. So, if you have a few years until you need the money you might want to avoid too much risk. And if you have a few decades, you might decide that you can afford to be more risky. This is a personal choice that will change as your knowledge changes. The important thing to know is that you CAN lose money, so you should always have a variety of investment types, and you should always keep an eye on how your investments are doing over the long term.
Ways to combat risk, include switching to less risky investments as you approach the time when you need the money. And diversification. Diversification is the process of spreading your investments over different industries, countries, or investment types to ensure you don’t have all your eggs in one basket. Many investment planners recommend this. Other investors stay narrowly focused instead on an investment they know a whole lot about. They try to maximize their earnings this way. But for beginners, diversification is usually recommended as a good way to reduce risk.
Some beginners decide that they don’t want to have any risk, so they stay with savings accounts and certificates of deposit. These investments produce such small returns; typically interest rates at less than 5%, that these investors face another kind of risk. They risk losing money to inflation, and they risk missing out on bigger returns. The old saying of not keeping all your eggs in one basket applies here too.
Why Should I Invest? And Why Learn About It?
If you do nothing with your savings you are really losing out. Your money has an incredible power to earn more money. Through the power of compound interest (earning interest on top of interest) your money can really grow over time. For example, a rule of thumb says divide 72 by the interest rate to get how long to double your money. So at 8% interest annually you’ll double your money in 9 years (72 divided by 8 is 9). Imagine doubling your money every 9 years. Not bad huh? Another reason to invest is that most people won’t have enough money to retire unless they save actively and invest well. Inspired yet? So start learning..
Why should you learn about investing? Can’t you just pay an investment advisor/planner to take care of it for you? I used to think the same thing. But aren’t your finances pretty important? Many people spend more time planning what they are going to wear each day or where they are going to go on vacation each year, than they spend on planning their financial future. Silly! There are some investment professionals that will give you good advice and pay close attention to your portfolio year after year. But some will just let your investments stagnate, and some care more about their own commissions than your earnings. You should never invest in something you don’t understand, and you should never take a hands off approach. Your future depends on this and starting by reading this article is a great first step. Congratulations, you are investing right now, yes, you are investing in knowledge that will help you in the future. Ok, that’s cheesy, but it’s true.
Where To Start
You can start by reading the rest of the articles here and then moving on to other financial websites and books to expand your knowledge. Then get a good look at your own financial situation. Make a budget and estimate your net worth. Find out what you have to work with. Then, armed with knowledge of investing and of your own finances you can begin by talking to your bank and to a highly recommended financial planner to see what your other options are. Or you can do it yourself with any one of the many online trading companies like Etrade or Credential Direct. Learn first, start slow, and finish rich!