Oct 10, 2017
If you have never invested your money before, the concept may seem overwhelming. Stocks, bonds, mutual funds, dividends, short-selling – where do you begin? We are here to walk you through the basic concepts of investing and help you understand what it takes to develop an effective investment strategy.
Investing can be an essential component in saving for your retirement. Currently, the average savings account offers an Annual Percentage Yield (APY) of 0.06%.i If you place $10,000 in a savings account with that APY compounded annually, you would have $10,120 – or just $120 – saved toward your retirement in twenty years.
On the other hand, if you invested your money in the stock market, it could generate much higher growth. The stock market is always fluctuating and the growth percentage is unpredictable. However, if you were to earn an average of 6% a year through shrewd market investments, that $10,000 could be worth $32,071 in twenty years.
With that math, it is easy to see why many people choose to invest their money in the stock market in the hopes of earning a higher return.
There are many ways you can invest your money and work to build your wealth. Here are a few examples of investments you may want to consider when starting to build your portfolio:
A stock is a piece of ownership in a company. If a company is publicly traded, you can buy shares of that company and have a claim on the company’s assets. A company’s success can greatly improve the stock’s price, meaning more growth for your investment.
Stocks also provide dividends. A dividend is when a company distributes a portion of its earnings to its shareholders.
A bond enables an investor to lend money to a corporation or government. This allows an entity to grow their funds through investors rather than taking a loan from a bank. Most bonds feature a pre-set interest rate for a specified term.
Bonds usually come with a lower risk than stocks, but they may also provide the investor with a lower return rate. ii
A mutual fund is a collection of stocks, bonds, and other investments assembled by an investment manager. Mutual funds can track indices such as the S&P 500, or they can constitute a unique collection of investments specifically selected by the manager.
Mutual funds may require a minimum initial investment and possible fees. Review the fine print when selecting a mutual fund to avoid surprise expenses.
Exchange-Traded Fund (ETF)
An ETF is similar to a mutual fund as it also represents a collection of stocks. Many ETFs track markets such as the S&P 500. Unlike mutual funds, however, an ETF can be exchanged at any time during the trading day like stocks can. A mutual fund is limited to being traded at its collective value at the end of the day. iii
There are several different places where you can begin buying and trading your investments. Find the platform that fits with your lifestyle.
A financial advisor provides you with professional service and face-to-face meetings. Many people think of financial advisors as people who have large sums of money to invest or as being focused on retirement. That may be because financial advisors can sometimes charge a significant fee for their services.
With a little research, you can find advisors that can tailor their services to your precise financial needs.
Many 401(k)s and IRAs offer you the opportunity to build your retirement savings by investing in the stock market. Retirement accounts can also offer different tax incentives that can help you avoid capital gains taxes. Look into retirement savings options provided by your employer or talk to a tax professional to help you find the right account for you.
Invest while you’re on the go. There are numerous mobile applications currently available that allow you to trade from your phone. While this may be a convenient option, you will still need to know what you are looking to invest in.
Due to the simplicity of the format, an investment app may not be the best tool for first-time investors looking for assistance in selecting their investments.
A robo-advisor is an online program that allows you to invest money through an online broker. A computer program helps you decide what to invest in and can make updates and adjustments to help ensure that the stocks and bonds you invest in are aligned with your financial goals. You tell the program the amount of risk you are willing to take, along with a few other financial preferences, to assist the program as it creates a portfolio that is statistically most likely to meet your needs.
Investing in the stock market will not guarantee millions of dollars in return. However, it can help push you closer to your retirement goals faster than a traditional savings account. If you don’t feel comfortable investing, talk to a professional about an investment strategy that works for you. You can also begin by investing a small amount of money you feel comfortable risking. In the meanwhile, high-yield savings accounts and certificates of deposit are always great ways to build your funds while you become a more confident investor.
[i] “Here’s How the Average Savings Account Interest Rate Compares to Yours” GoBankingRates.com https://www.gobankingrates.com/savings-account/what-average-savings-account-interest-rate/ July 23, 2017
[ii] “Defining the 3 Types of Investments” Investopedia. http://www.investopedia.com/articles/younginvestors/10/what-is-an-investment.asp February 24, 2017
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