Investing For Beginners

You’ve probably heard stories about people making a killing in the stock market, or getting enough out of their investments so that they can retire early.  When you invest, you are putting your money to work for you – rather than going out and actually doing the labor yourself.  As hard as you might work, your money has the potential to make a lot more money than you do.  The key, though, is making wise decisions.

So, how can you do it?

In order to understand the basics, you need a crash course in Investing 101.

Let’s start by going over two of the most common investments – stocks and bonds.

If you went out on the street and asked 100 people what the difference is between stocks and bonds, most of them probably couldn’t tell you.  But, if you really want to make money off of your investments, you have to know what makes these two options different.

When you buy a share of stock, you are actually buying a small portion of the company.  If your stock accounts for 1% of all of the company’s stocks, than you own 1% of the company.  Since you’re a partial owner, you are also part of the profits and losses that the company experiences.  The more money the company makes, the more your stock is worth.

With stocks, the goal is to “buy low and sell high” – meaning that, if you find the right investment, you can buy it for a bargain, then watch the company grow, and sell you stock for a much higher price than you paid for it.

Bonds, on the other hand, don’t give you any ownership in the company. 

So, how do they work?

Let’s say a company wants to expand – but doesn’t have the money to pay for it themselves.  The company will sell bonds to cover the cost.  In return, you will get paid back over the life of your bond. 

Usually, bonds last several years.  In each of those years, you will get paid interest payments that are based on a fixed rate that you agreed to up front – like 4% or 5%.  Then, when your bond expires, you get your initial payment back.

Since your terms are settled up front, the money you make with bonds does not depend on the company’s profits.  Whether the company is operating in the red, or turns a massive profit, you still get paid the same amount.

So, how much money can you really expect to make?

Stocks are riskier – but they can also be more profitable.  The safest stocks will, traditionally, give you about a 7% rate of return.  But the bigger risk you take, the more money you can make.

Bonds are safer – and they usually do not generate the profits that stocks do.  A good bond will usually give you a rate of return of 2-4%.

Before you invest in anything, though, it is important to remember the Golden Rule of Investing 101 – never invest money that you can’t afford to lose.  There is no “sure thing” in investing.  The money that you need for your rent payment, food, or utilities should be kept out of your portfolio – no matter what type of opportunity pops up!

Another rule in Investing 101?  You can make your portfolio as unique as you are!

You can tailor your investments to things that interest you.  For example, if you have a passion for construction, you can invest in construction companies, or even companies that manufacture construction equipment.  Remember, there are no fixed rules about what has to be in your portfolio.

Once you learn more about the investing world, there is another important Investing 101 rule to follow – go with your gut.  If something just doesn’t feel right, don’t pursue it.

To learn more, visit investing for beginners.