Investing might seem intimidating, but it is one of the best ways to multiply money and develop wealth over time. The stock market, while attracting a large number of investors, isn’t the only way and place for investment for beginners. You also have CDs (certificates of deposit), mutual funds (MFs), bonds, and more. Also, determining your long-term financial goals is what dictates the kind of investing strategies that will best suit you. Here’s a helpful guide to investment for beginners. Why is investing important? Investing allows you to access the power of compounding interest. For instance, if you invest $10,000 and the investment grows at 6% annually, your compound interest earnings for one year are $10,616.78. Sans compounding, you would have earned only $10,600. Compounding allows you to turn your modest savings into a serious nest egg over a period of time. In addition, the earlier you begin investing, the more you will gain from compound interest. Here are some investment options for beginners: Types of investments
- Stocks: Stocks are company shares that make you a part owner of that company since you hold “equity” in it. Intrinsically attached to the company’s financial performance, stock prices go up when the business does well and vice versa. Since stocks/shares/equities are volatile in nature, they are some of the riskiest investments for beginners, but they also translate to high returns.
- Fixed income: Fixed-income securities include the likes of CDs, municipal bonds, corporate bonds, and U.S. Treasury bonds. They appreciate with a specific interest rate and are generally reliable and safe. However, they also have some disadvantages. Firstly, their return potential is weaker than equities, and secondly, they don’t take inflation into account. More importantly, when interest rates rise, the prices of the existing bonds will fall, and you could miss out on better fixed income investments.
- MFs and ETFs: Mutual funds and exchange-traded funds, while sharing many of these characteristics, also have a few distinct differences. An MF is a company that pools the investors’ funds for employing a predetermined investment strategy. While some track indexes, others invest in bonds and stocks. Also, minimum investments can be anywhere between $500 and $3,000. ETFs trade like shares. While many ETFs follow well-known indexes, others track stock collections, focusing on industries like manufacturing, tech, or healthcare.
- Real estate: One of the oldest ways to invest is in property. Investment for beginners in real estate could be by building property and selling it, or by owning property and collecting rent.
Investment strategies Investment strategies for beginners fall under the spectrum of low return to high return and low risk to high risk and can usually be of these kinds:
- Low returns and low risk
- Low returns and high risk
- High returns and high risk
The decision depends on your time frame of investing. According to conventional wisdom, you can afford to take more risk when farther from retirement, translating into a stock-heavy portfolio in your 20s. Similarly, avoiding risk and preserving gains is what needs to be done when you begin approaching retirement, translating in a shift to a bond-heavy portfolio.
