Updated: Aug 1
Many people think it's not possible to get started investing because they don't have enough cash. With today's digitization, access to the internet, and financial tech or FinTech companies it has become much easier to invest.
It has been proven that the earlier you begin investing the better off you'll be in the long term.
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What is Investing?
Investing is setting aside money into an account, selecting a security or investment (stocks, bonds, ETF's, crypto, forex, real estate, college education) with the expectation of getting profit or appreciation of value.
When people talk about investing, they are usually talking about placing their money in the markets. The financial markets are mostly entirely online, are where people and businesses can buy and sell assets as the ones listed above.
What is a Trade?
A trade is the general term for a transaction in the financial markets.
You can buy a financial asset, which makes you it's owner. If the value of the asset goes up, your money has grown.
You can sell a financial asset that you own meaning you transfer the ownership to someone else in exchange for its value in cash (called capital gains). For example if you purchase a stock at $20 and it goes up to $25 and you sell it at $25. You now have a profit and capital gain of $5
Investment: the action or process of investing money for profit or material result. Capital Gains: the profit you make when you sell an asset (like stocks, bonds, gold, property, currencies, collectible art/sports cards etc.)
The actual trade takes place on an exchange (like a marketplace where buyers and sellers come together) for trading of the asset type.
There's often a physical location that's the HQ for the exchange where the official record keeping takes place, but the exchanges operate mostly digitally now.
As an example, trading stocks takes place on one of the major stock exchanges, one you may have heard of is the New York Stock Exchange. You can make trades on these exchanges from anywhere in the world.
Market Growth Rates
The financial markets can be a great place to save and grow your money because your money can grow a lot faster than it might just sitting in a bank account.
The money you invest in the financial markets usually grows by about 7% - 12% on average each year. This can vary depending on the economy and what types of investments you have.
Compared to a savings account, which usually grows by only 0.5% on average per year. As we view each investment the savings account will not keep up with inflation and is the lowest risk investment. The market could be considered a moderately risky investment, however historically the market has always increased in value.
Interest & Capital Gains
Some asset types (like T-Bills, I-Bonds, and regular bonds earn interest similar to savings accounts. While other asset types (like stocks and funds) earn capital gains - but the concept of compounding value works the same way regardless.
If you begin trading stock you'll always want to purchase or buy at a lower price, and sell your asset at a higher price in the future or after you bought it. Investments will vary over time due to factors such as:
How the company is doing
How the economy is doing
How the public views the company
Lawsuits and legal proceedings
Corporate financials, revenue, profit, earnings per share
and many more factors
Buying an asset when the value is low (meaning you'll pay a lower price), and then selling when the asset rises to make more money is a great way to increase your returns!
Risk / Return
Some types of investments are more volatile, or fluctuate more than others. Investments that may trade in a wide range are considered volatile.
Where do the values come from?
Buyers and sellers trade in asset markets, think (foreign exchange and crypto, open 24 hours a day, and stock equity markets that trade 24 hours a day on various country exchanges, such as the Shanghai Stock Exchange or London Stock Exchange.
Buyers will place a higher or lower value on the asset that you hold, which makes the price fluctuate minute to minute. For example, if news broke that a pharmaceutical company had a breakthrough blockbuster drug approved by the FDA, buyers would place a higher value on the stock because they would expect huge sales, profit, and earnings for that company. If you bought that stock prior to the news, you would be able to sell it as the price rises or hold onto it in hopes the company continues to perform well.
Investments that fluctuate in value a lot more such as crypto would be considered "high risk" because the price is less predictable. For example the crypto you hold could dramatically increase in value, and you could have a great return, or they could drop a lot in value and you could have a loss.
Other investments are considered "low-risk" because they're much more predictable. They'll almost certainly grow at a pretty steady rate, but his growth won't be as large as it could be with riskier assets.
Whether it's better to invest in high risk or low risk investments totally depends! One factor that impacts it is your "time horizon."
To figure out your time horizon, just ask yourself, how long do you plan to invest your money?
You can have different investment goals for different lifestyle events such as:
Buying a Home or Car
Saving/Investing for Graduation (529 Plans)
Investing for Retirement
Investing to Start or Buy a Business
Investing to Go On a Luxurious Vacation
If you have a short time horizon and you go with a high risk investment you'll potentially lose your investment. But if you will not need the money for a super long - time, like retirement or saving for a new born baby college education you may be able to take more risks, because you'll have time to earn back any money you may lose in the short term as time goes on due to market economics, along with the fluctuation and volatility of the stock.
No matter what type of investments you choose, financial experts recommend that you diversify your investments. A diversified investment portfolio would look something like this:
With diversification, you don't put all your eggs in one basket. It's best to have a range of asset types with various risk levels across different industries. This protects you if something happens and one of your investments loses value, you won't lose all your money.
A perfect example of why you would need to diversify are Bed, Bath, and Beyond stock. ,The price hit $20 during the year, the high was $30. Now if you held onto the stock as the company deals with many complex challenges and is contemplating bankruptcy the stock price is now at the time of writing $1.49. If this was your only stock holding, you entire investment is almost completely wiped out!
Common Types of Investments
Exchange Traded Funds
Options & Futures
Gold & Silver
Real Estate & Real Estate Investment Trusts (REIT's)
a type of investment that represents a specific amount of ownership in a company
A stock also called an equity is the most common type of investing. When you purchase stock, you are investing in owning a small piece of a publicly traded company. This means you'll share in the company's profits/losses through share price performance.
Publicly traded companies have a set number of shares that trade on the market. If the value of the company increases so do, the shares.
When people buy and sell stocks, they're trying to make predictions about how the value of the company is going to change in the future.
If you think the value of a company is going to go up soon, it might be smart to buy some shares. If you think a company is going to start losing value soon, it might be time to sell the stocks.
Predicting the value of a company is not always easy as there are various factors involved.
Shorting: You can profit off of stocks that lose money and their share prices drop. This is called shorting the stock.
The value (and therefore the cost) of a share varies a ton by company from a few cents to thousands of dollars. For valuable companies, share prices can get pretty high. Take Seaboard Corporation (SEB) for example which at the time of writing trades at $3,800 per share. In this case if you wanted to purchase some of SEB, but didn't have the full $3,800, brokerages have allowed investors to purchase fractional shares, or a percentage of 1 share. For example if you invested $380 in SEB, you'd own (0.10) of 1 share, or 10%.
When you want to buy some shares of stock, there are 2 main ways to make that purchase:
Placing a market order means you want to buy the shares right now at the current price.
Placing a limit order means you're putting money aside and saying you want to buy shares if they reach a certain price point
You also indicate your position size, or how many shares you want to buy.
How Much Should I Invest
The video below will provide great insight on How Much You Should Start Start Investing With and how to free up additional cash to get there.
Apps To Help You Invest
There are financial app's that let you invest as little as $5 and for some you get a bonus stock! These platforms are web and app based such as:
Making Money From Stocks
The main way that you make money from stocks is when and if the value of each share you own increases as the value of the company increases (though you actually get this money as cash until you sell the asset)
But as a partial owner of the company, you also get to share in some of the company's profits in the form of dividends.
Dividends: a portion of its profits that a company may pay to its shareholders, or anyone who owns stock in the company Note: Dividends count as "income" that you'll have to pay taxes on!
Most people only have access to shares of stocks that are publicly traded, meaning anyone can purchase shares on the stock exchange.
A company's stock becomes available for public trading through an Initial Public Offering (IPO). This is when the company's stock becomes available to the public to take part in ownership or buy shares. You can buy shares directly from the company through the IPO, or buy later on the secondary market from individual shareholders trying to sell.
What is a Bond?
A bond is a form of investment where you're giving a loan to an institution or organization in exchange for a pre-determined interest rate. You purchase a bond for a set amount of time. You earn interest throughout the life of the bond, and then get your initial investment back at the end of the set time.
This is a type of fixed interest security, which are among the least risky investments, because the amount that your money will grow is predetermined and predictable. Remember, the safer the investment the less you'll earn as a return.
Buying a Bond
Bonds aren't traded directly on an exchange, they come directly from the bank or government issuing the bond. Almost always, you'll have to go through a broker to buy a bond, unless you are purchasing US federal bonds, which you can buy through the government's treasury website at www.treasurydirect.gov, you'll avoid paying a broker fee this way.
What are Mutual Funds?
A very common investment vehicle is mutual funds, which are essentially pools of money from a bunch of investors that get invested in a bunch of different stocks (or other assets of that type)
The price per share of investing in a mutual fund is usually described using the net asset value, which is an average of the value of all the assets that are apart of the fund. Mutual funds are a great way to diversify your investments and set them on auto pilot because your money is automatically invested in a range of assets.
Keep in mind that although this is an easy way to set and forget your investments and watch them grow, you'll have less control over exactly which stocks you invest in. Stock selection and portfolio make up are the responsibility of the mutual fund's portfolio managers.
Mutual funds often focus on one area of expertise and invest in similar types of stocks.
Some types of funds include:
Large Cap: big companies with a value of $10 billion or more
Mid-Cap: mid size companies with a value of $2-10 billion
Small-Cap: companies $300 million to $2billion valuation
Foreign Market: invest in overseas companies
Emerging Market: invest in companies in countries that are developing rapidly
Growth Funds: take more risks to beat average market returns
Impact Funds: consider the mission of a company and invest based on a specific purpose
Actively Managed Mutual Fund
A broker (portfolio manager) is paying attention to the stocks in the fund and making decisions about what to buy or sell for the fund.
Passively Managed Mutual Fund
The fund is set to track and mirror another fund that already exists, so it's pretty much on auto-pilot. These funds will usually have lower fees due to lower human resource costs as these are like imitation or robotic programs that run and can be tweaked with rules, logic. or coding as they are programmed to mimic other funds with potentially slight adjustments based upon the funds goal and risk determination.
Mutual Fund Takeaways
Repeat transactions automatically
There is usually a Minimum Investment usually starting between $1000 and $3000
No price control - Regardless of what time of day you place your order, you'll get the same price as everyone else who bought and sold that day. That price isn't calculated until after the trading day is over.
Index Funds & ETF's
Additional potentially lower cost options vs. a mutual fund are index funds and ETF's (exchange traded fund) which are similar to each other.
An index fund invests in the same exact stocks as a popular index such as the S&P 500 or Dow Jones. Index funds only calculate value once per day and have slightly less flexibility to buy or sell whenever you want.
ETF (Exchange Traded Fund)
ETF's value are constantly updated and they trade like individual stocks. ETF's have a variety of options depending on what you are looking for. You can select from various industries and sectors.
Some ETF's for example have a strict focus on Steel, Gold, Artificial Intelligence, Environmental, Solar etc. The ETF portfolio fund manager will select top performing gold stocks or stocks expected to perform well in the future. Or the fund manager may select various artificial or solar stocks that re expected to perform well. When viewing an ETF, look for "fund holdings" this will inform you all the stocks or holdings that makes up an ETF's portfolio.
Here is a fund screener that can help you identify ETF prices and the various areas ETF's cover.
Beyond more common forms of investing, there are additional ways you can invest your money.
Cryptocurrencies are 100% digital currencies built on blockchain technology that are also viewed as an investment.
Some of the benefits of crypto are:
the permanent, unchangeable record of crypto trades makes it more secure transactions are encrypted, so they're anonymous
it's decentralized, meaning there is no requirement or need for a central bank or government to regulate and manage trades
It's more protected from inflation than real world currency
purchasing crypto is open to anyone, it's equal access investing
Some drawbacks of crypto are:
Highly volatile, meaning it has high risk
The industry has been shaking out scammers a hackers, as some coins are not real coins.
Our advice would be to invest in coins with utility and market measures that you can understand
The blockchain is a database where information about cryptocurrency is stored. Every transaction is recorded, and the information is unchangeable. It is public domain as well, so if you have the address key or location where you sent or received the currency, you are able to track and find this transaction on the blockchain.
Think of it as an accounting ledger that records transactions that can never be erased. The data about transactions are grouped together in blocks, and the blocks are linked to one another, this is where the name "blockchain" comes from.
A blockchain database is a "distributed database," meaning it isn't stored in one computer. IT's stored across a network of computers, which makes it harder to hack.
Investing in stocks and real estate has been proven to build wealth for families and generations. It is also beneficial to prepare for emergencies, meet life goals such as buying a home, marriage, and/or saving for retirement. This is a great way to purchase assets and let your money work for you. For more information on How to Invest while aligning your life goals check out our Why Invest course presentation.
Before you start investing you'll want to ensure you have a Budget and goals tied to the budget in order to create your Rainy Day and Emergency Savings Fund. For budgeting and savings assistance go to our Budget & Savings Courses.
Rainy Day Fund
A rainy day fund should be $500 - $1000 to have for a gift, short vacation, or flat tire.
If you own a new or used vehicle some unexpected expenses could occur such as a flat tire, transmission/engine issue, or even an accident. Your rainy day fund may be able to take care of this depending on the expense, but you can supplement the expense with your Emergency Savings Fund.
Emergency Savings Fund
Your Emergency Savings Fund should be about 3-6 months living expenses. Anything greater than that is a plus. The reasoning is that it could take you 3-6 months to find a job.
If you are unemployed you an use your Emergency Savings Fund as a supplement to unemployment.
If you've been watching the news lately there have been fires, floods, tornadoes and abnormal weather. If you are a homeowner you'll want this fund setup for any unexpected expenses that may occur. In addition there are major costs for example if a furnace, air conditioner, roof, or gutters require replacing.
If you've been watching the news lately there have been fires, floods, tornadoes and abnormal weather. If you are a homeowner you'll want this fund setup for any unexpected expenses that may occur. In addition there are major costs for example if a furnace, air conditioner, roof, /or gutters require replacing.
Now You Are Ready To Invest
Fantastic, you've got your Rainy Day and Emergency Savings set!
Investing is the best way to make your money work for you, prepare for short and long term goals as well as retirement. You'll have to decide if the market excites you, or if you just want to set and forget it.
However, if you are a Long Term, "Set it and Forget It" Investor, Index Funds which follow the major indexes, Exchange Traded Funds or ETF's are a basket of stocks with a particular theme or index related themes. A cool thing about ETF's is that some give you double and/or triple volatility. So if you have an ETF betting with the market if the market moves 1%, you'll receive 2x or 3x on your investment. That sounds great right! Well be careful, because if the market moves against you 1%, your investment will also move against you 2x or 3x. This also works inversely, meaning you can bet with a falling market if the market is in a confirmed downtrend. These funds are called leveraged ETFs
Conservative 'Low Risk" Investing
If you are looking for more conservative ways to invest your money, maybe you have a shorter time frame there are Treasury Inflation Protected Securities or TIPs, Bank Certificates of Deposit, or I-Bonds.
All of these investments will have a below stock market rate of return because the stock market is more risky it provides investors with a higher return on invested funds if the companies invested in do well. CD's and Bonds on the other hand have set return rates, are less risky, equaling a smaller return on your investment. This article does not touch on junk bonds which are a riskier asset class.
We hope you feel a bit more informed on the direction you wish to take to start making your money work for you!
Reflect on your goals for investing
Identify your risk tolerance
Determine what types of assets you are comfortable investing in
Identify your timelines and exit strategies
Think BIG. Dream BIG.
Biddles Investment Group