Basics of Investing

Basics of Investing

Investing is not child’s play, and one must be well versed with the basics of choosing the right ways to earn more by using their existing funds. We have come up with the fundamentals of investing which are critical for avoiding mistakes that can ruin your financial career before it even starts. Study the article thoroughly to choose the best channels of investment that suit your situation.  

Different types of investment 

•    Stocks

Stocks are the stakes of a company that are bought to earn partial ownership of that firm. Also known as equities, their prices are based upon the company’s performance. Stocks can provide you huge returns over a long period, but they are also highly volatile. 

•    Bonds 

Bonds or fixed-income investments are well known for creating a steady source of income. Although, they are more stable than stocks yet they tend to react upon interest rate fluctuations. However, their returns are comparatively low. 

•    Cash

The category of investment includes money market accounts, CDs and savings accounts. They are technically risk-free, but their profits are negligible too. 

•    Mutual Funds and ETFs

Also known as exchange-traded funds accumulate funds from a pool of investors and invest them in stocks and bonds. They guarantee to pay a certain sum of return to investors and generally safer than investing separately. 

Nonetheless, as stocks are more volatile, they are preferred by young investors. On the other hand, bonds are best for people who want to keep things predictable; this category mainly favors older investors and newbie players. Meanwhile, there is no need to go for cash investment until you have near term liquidity needs. 

The right amount to invest 

There is no “right” amount of investment as it all depends on your earning capacity. But, as a rule of thumb, you can start with 10% of your income. You can easily invest six percent of your money in a retirement account and the rest to your 401(k). 

Investing as soon as possible is essential. Initially, the money you save will not be convincing, but with time the amount will only become massive.  Start investing while you are young to bear its fruits when you need money the most.

Taking the correct investment role 

Generally, there are two major investing roles. One of them is an active investment; it is the process of buying stocks, bonds and mutual funds which are managed by professionals. Thus, an active investor aims to outperform the market by paying a fee. 

A passive investor tries to match the market’s performance. There is no management team to provide advice, and the sole goal is to mimic benchmarks set by the market. 

People who have time to work upon every stock must go with active investment. On the contrary, passive investment is best suited for people with regular jobs. 

Eventually, you will have to open brokerage account too. It is better to go for accounts that provide educational features and investment research to begin the journey. It would be wise to opt for the brokerage with the lowest rate of fees as fees often eat away your profits. Remember, investment only rewards the smartest.

David Robertson