An introduction to investing for beginners
Before we dive into investing in earnest, a gentle suggestion for beginners… get comfortable . The field of investing is vast and there are literally countless things to learn about investing. The best, most successful investors will tell you that they are constantly learning and constantly honing and expanding their skills in making money in the financial markets.
You can’t learn everything there is to know about investing, or even investing for beginners, in a day, but luckily, you don’t have to in order to start a career as a successful, profitable investor.
One of the most glaring holes in our education system is the lack of even basic education in the area of personal finance and investing. One of the most successful traders in history once remarked, “If only I had been taught in high school what I could later learn about investing on my own, I might have been rich by the age of 35.”
Perhaps this is a somewhat “optimistic-in-hindsight” prediction of investment success, but there is no doubt that anyone can reap enormous financial rewards by taking the time to learn the basics of investing early in life.
So be grateful if you’re reading this guide at age 16, but don’t despair if you’re past high school age or even middle age. It’s never too late to start building a fortune through investing, and the sooner you start, the sooner you’ll move beyond investing for beginners and achieve your financial dreams.
At this point we’d like to emphasize two truths to you: One is that taking the time to acquire even the most basic knowledge of investing, whether you’re sixteen or sixty, will put you far ahead of your peers. In terms of financial literacy, and ultimately, financial success.
Another truth comes from one of the wealthiest commodity futures traders. This wise, old man shared an important “secret” about investing and wealth – “You can make a lot of money faster by sending money to work for you every day, instead of sending yourself to work every day.”
Basic types of investment
This is the building block of investing for beginners. There is an endless list of specific investments you can make, but almost all investments fall into one or another of a handful of categories commonly referred to as “asset classes”. An asset class is made up of investments with similar characteristics that are generally governed by the same set of financial rules.
The asset classes most people are familiar with are:
2) Fixed income investments/bonds
3) Cash or cash equivalents, such as money market funds
There are many other asset classes that you may want to invest in at some point, including:
1) Commodities and futures such as oil or gold
2) Alternative investments, including real estate, foreign exchange (forex) and collectibles
3) Sustainable, responsible and impact investing (SRI) with a primary focus on beneficial social or environmental impacts
Equity investing, the buying and selling of stock in publicly traded companies, is what most people think of when they hear the word “investing” and is a popular investment for beginners.
Publicly traded companies give investors an equity interest in the company through the purchase of stock shares. For example, if shares of Advent Wireless (AWI) are trading at $1.28 per share, you can buy 100 shares for $128.00.
By selling shares, companies are able to raise capital to help them grow or expand.
Stock investors can buy stocks to profit from increases in stock prices; Sell the stock to make a profit as the stock price drops; Buy or sell options on stocks or stock indices. Stock investors can try to profit by receiving stock dividends. Dividends can be seen as earning interest from the stocks you own, or per-share bonuses. Dividend.com is an excellent website for researching and comparing dividend-paying stocks.
Stocks are traded on exchanges such as the Vancouver Stock Exchange (VSE) or the New York Stock Exchange (NYSE). Exchanges regulate and facilitate the trading of shares.
The most important factor that determines a stock’s price is how well the company is performing. Other factors that affect share prices include how well the overall industry the company is a part of is performing, the performance of competitors, economic conditions, and government actions.
Stock investors are primarily guided by technical or fundamental analysis in their investment decisions. (For more information on technical and fundamental analysis, see the section “Principles of Investment – Technical and Fundamental Analysis”)
Fixed Income Investing for Beginners
Fixed income investing refers to investing in debt securities that pay the investor a fixed-rate interest over a specified period of time – the life of the debt security. Debt securities are commonly referred to as “bonds”. The bond market is one of the largest markets worldwide, thanks to the massive borrowing by most governments.
When you buy a bond, you provide financing to a company or government, and in return, you receive a specified interest rate known as the “coupon rate.” Interest on bonds is usually paid semi-annually or annually until you repay the entire principal amount of the bond on the bond’s specified maturity date.
The coupon rate is the yield paid at the time the bond is issued. As interest rates fluctuate over the life of the bond, the value of the bond and its actual “yield to maturity” change. Coupon rates do not change over the life of the bond, but changing interest rates affect the bond’s value and yield. When interest rates rise, bond prices fall; Conversely, bond prices rise as interest rates fall.
For investors who hold bonds to maturity, fluctuating yields in maturity rates over the life of the bond have no practical effect on their investment returns. The current yield to maturity rate is applicable only if you buy or sell the bond in the secondary market before its maturity date.
The primary appeal of fixed income securities is their relatively low risk. If you’re buying bonds issued by a large country like the United Kingdom, you’re virtually guaranteed a specified return.
Some bonds are issued as “zero-coupon bonds”. Instead of offering regular interest payments, zero-coupon bonds are sold at a significant discount to the bond’s face value. Investors make returns by buying bonds at less than face value and then redeeming the bonds at maturity for full face value.
(For example, a zero-coupon bond with a face value of $5,000 may sell for $4,500. An investor pays $4,500 to purchase the bond and then sells or redeems the bond with a face value of $5,000 at maturity, thus returning $500, or 10%, on their investment. ).
Bond sellers – Governments and corporations
Bonds are sold by national, state and municipal governments. Municipal bonds are very popular because many municipal bonds earn interest tax-free.
Apart from governments, corporations also issue bonds to obtain financing. Corporate bonds often pay higher interest rates than similar government bonds, but they also carry more risk. Corporate bonds are also generally more volatile than government bonds because their value can be affected by the perceived value of the corporate issuer.
Fixed income investments may appeal to investors planning for retirement who have a large amount of investment capital available during their working years. Such investors can buy large amounts of bonds, collect interest payments while they work, and then in their retirement, the bonds mature and return the principal (principal value) to the investor.
Other asset classes – Commodities, Forex and other alternative investments
We don’t have enough space here to provide an in-depth look at each asset class – all of this, just as a beginner’s guide to overall investing. (But you can expect future content from us on alternative investments.) However, we can at least make some basic comments about other asset classes.
The most common attraction and potential benefit of alternative assets such as commodity futures and forex trading is leverage – the ability to use a relatively small amount of investment capital to control a relatively large investment. For example, commodity futures trading typically offers leverage in the neighborhood of 10:1. In other words, investing in a standard 100 troy ounce gold futures contract typically requires a margin deposit of only 5-10% of the contract’s total value.
In short, leverage gives you the ability to make a lot of money with little money. However, leverage applies to both positive and negative investment outcomes. Just as leveraged investments increase profits, calculated as a percentage of required investment capital, they also increase losses.
Investing in leveraged investments requires careful money management. Unlike buying stocks or bonds, where the absolute maximum possible loss is no more than your total investment, with leveraged investing, it is possible to lose more than your total investment. Investors unfamiliar with trading leveraged investing often find their trading capital dwindling at an alarming rate.
Leveraged investing, used wisely, can be an excellent tool to quickly grow your investment capital. But to successfully leverage such investments, you need to clearly understand the associated risks.
We do not advise you to avoid leveraged investments altogether, but we strongly urge you to ensure that you fully understand the implications of using large amounts of leverage before trading them.
Principles of Investing for Beginners – Risks and Opportunities
One of the basic principles of investing for beginners is this – risk and opportunity go hand in hand. They increase or decrease in conjunction with each other. Investments with high potential returns carry a high level of risk. Similarly, investments with a low potential return on investment (ROI) typically offer greater security and less risk.
For example, a cash equivalent investment, such as a certificate of deposit (CD), offers a much lower but guaranteed rate of return. Such investments are suitable for individuals with very low-risk tolerance, who are more concerned about growing their investment capital than protecting it. In contrast, equities offer a much higher potential rate of return – 10% or more annually – but also carry a greater degree of risk. Equity investment does not guarantee returns.
Because of the correlation between risk and potential return, investors must carefully consider their risk tolerance when choosing an investment – how much risk you are willing to accept in exchange for the chance of receiving “X” amount of profit.
It’s also important to think about your personal investment goals – the reason for your investment choices. An investor who is looking to earn a second income through investing, or to build up a large enough wealth for retirement, will make very different investment choices than an investor who is just looking to earn a small amount of interest to help cushion and protect against inflation. purchasing power.
Principles of Investment – Fundamental Analysis
When analyzing investments, investors tend to fall into one of two camps – those who base their decisions on technical analysis and those who primarily use fundamental analysis.
Fundamental analysis refers to analysis based on economic data or reports, such as the monthly Non-Farm Payroll (NFP) report in the United States, which is considered an important indicator of the overall health of the economy and especially job growth.
Along with key financial reports such as the producer price index (PPI) and gross domestic product (GDP), fundamental stock investors evaluate stocks based on information contained in a company’s financial statements and earnings reports (often reported as “earnings per share,” or EPS). Investors also examine various financial ratios, such as the debt/equity ratio or price/earnings ratio, to evaluate a company and its stock price.
Principles of Investment – Technical Analysis
Many investors prefer to rely on technical analysis when making investment decisions. Technical analysis evaluates a security based on market price and trading activity rather than fundamental financial or company information. Technical analysis uses price charts, patterns, technical indicators, and market activity (such as trading volume) to predict the potential future price movement of a security.
Technical analysis is often preferred by short-term or day traders. Long-term investors who buy and hold securities rely more frequently on economic fundamentals, but in the short-term – trading within a single trading day – such fundamental factors have less impact on a security’s price movement than technical factors.
Of course, some investors combine fundamental and technical analysis when making their trading decisions. An investor in gold futures, for example, may make a buy or sell decision based on economic fundamentals, but may choose a specific price entry and exit/target point based on technical analysis.
Investment Principles – Invest regularly
Most people don’t realize how quickly they can grow a large investment account with just modest but regular investments. It is the magic of compounding that does this “trick”. Here is an example of compounding at work:
Assume you open an investment account with an initial $5,000 investment and the account provides a 12% annual return on investment. You will not make any further deposits into the account. Over 10 years, the account will have grown to a little over $15,500 – not a bad performance, rather than tripling your money.
But now assume you make a very small adjustment – just contribute an extra $50 per month to the account. Calculating a $50 monthly contribution over 10 years, your investment account has grown to $27,300 – almost double the size of your account without making any additional contributions. If you increase that monthly contribution to $100 per month, the 10-year account totals more than $39,000…and all from an initial investment of just $5,000, followed by very modest additional contributions on a regular basis.
A special investment vehicle: exchange-traded funds (ETFs)
This is an important section of investing for beginners. Exchange-traded funds (ETFs) have become an increasingly popular investment vehicle over the past few decades. ETFs are similar to mutual funds in that they use the pooled investment capital of many individual investors. ETFs offer a significant liquidity advantage over mutual funds because they can be bought and sold at any time throughout the trading day, just like individual stocks. In contrast, mutual fund shares can be bought or sold only at the closing price of the day.
ETFs also offer lower fees than mutual funds, which lowers trading costs and increases overall net profit.
The popularity of ETFs has also increased due to their versatility as investment vehicles. ETFs can be used to invest in virtually any type of security or asset class.
An ETF can hold a portfolio of transportation, banking or healthcare stocks. There are bond ETFs that hold a diversified portfolio of bonds with different interest rates and maturity dates. ETFs containing physical gold or silver are available for investors who want to invest in precious metals but prefer to hold ETF shares instead of physical metals.
Forex currency pairs can also be accessed with ETFs, just like other alternative investments such as hedge funds or private equity investments. ETFs also offer investors the ability to invest in portfolios that reflect popular stock indexes.
Investment Conclusion for Beginners: Invest in Investment Education
Investing is a skill – part art and part science – a practice that you engage in and use to make money. Like any other skill, from dancing to playing golf, there are many things to learn and it takes time to develop your skills as an investor.
Can anyone be a good, successful investor? We firmly believe that they can – that you can. It’s really just a matter of learning what you need to know (like how to use technical indicators) and then working diligently to apply the knowledge and skills you’ve gained.
You can choose to start investing in some ETFs that track major stock market indices and then move on to become a private equity investor in a few years. You may be so strongly attracted to investing that it becomes a career for you and you work as an investment analyst, financial advisor or hedge fund manager.
For now, go ahead and congratulate yourself on making positive, healthy changes in your life. Just by choosing to read this guide, you’ve taken an important, positive step toward creating a second income stream for yourself.
From now on, even when you are not “at work”, imagine how you can generate extra income for yourself as your money is busy making more money for you. Whether you’re a “market wizard” or just an average investor five years from now, you’re going to have a lot more money than you would have if you hadn’t chosen this path to wealth.
Investing for Beginners – How to Get Started
Here are some ideas on how to proceed now:
- Start planning your investment plan. Determine how much capital you have available in your investment account to begin with, along with what you can afford to add to it with regular contributions. Calculate how much you can reasonably afford to contribute regularly to your investment fund. Decide whether you want to contribute weekly or monthly. Here’s a tip to help you stay on track: After deciding the amount and frequency of your additional investment contributions, make things easier (and avoid the temptation to skip contributions) by setting up automatic fund transfers from your checking, savings or other accounts. in your investment account.
- Start tracking any and all expenses related to pursuing your education in investments because they are all potentially tax-deductible. Investing is actually going to be your new “home business” and it’s important to keep accurate records of your expenses so you can properly deduct and maximize your net investment profits.
- After reading this guide, you will already have an idea of what type of investment you find most attractive. For example, if you like the idea of using an ETF, consider a popular maker of ETFs like Fidelity Investments, along with visiting ETF information and analysis sites to learn more about ETF investing.
- Let’s briefly repeat what we noted at the beginning of this guide: it’s impossible to learn everything about investing in one day, so relax and don’t overburden yourself. However, from this day forward, it may help to consider yourself enrolled in an “investment university” working towards your doctoral degree in “earning a lot of money”. In addition to specifically studying any investment vehicle or asset class you decide to focus your investment efforts on initially, set yourself a course of study to become knowledgeable in finance and investing.