How To Start Investing: A beginners guide
Updated: Jul 31, 2020
Investing at a young age is one of the best ways to see excellent returns on your money.
"Compound interest is the eighth wonder of the world’ Investment helps to grow your money."
How that works, in practice: Let's say you invest $200 every month for 10 years and earn a 6% average annual return. At the end of the 10-year period, you'll have $33,300. Of that amount, $24,200 is money you've contributed — those $200 monthly contributions — and $9,100 is interest you've earned on your investment.
Market never stays constant and there will be upswings and down swings in the market. But investment last for years hence investors get plenty of time to grow their money. Therefore, it’s never too late to start investing.
The right amount you need to invest
How much you should invest totally depends on your investment goal and when you need to reach it.
Generally people target for retirement. If you are seriously planning for retirement then as a general rule of thumb, you can start by investing a total of 10% to 15% of your income each year for retirement — your employer match counts toward that goal.
For other investing goals, consider the time limit and start investing accordingly on a weekly or monthly basis.
Open an investment account
If you have a different goal in your mind, then you can keep aside the retirement plan and start by opening a taxable brokerage account. Now a days, trading accounts are extremely easy to open these days in this internet world.
A common misconception is that you need a lot of money to open an investment account or get started investing. That's simply not true. Many online brokers, which offer both IRAs and regular brokerage investment accounts, require no minimum investment to open an account, and there are plenty of investments available for relatively small amounts
Investment options available
It’s important to understand options available to invest and how much risk it carries. The most popular investments for those just starting out include:
· A stock is a share of ownership in a single company. Stocks are also known as equities.
· Stocks are purchased for a share price, which can range from a company to company.
Risk is high in stocks because the return on stocks are top notch in comparison to other options available.
· A bond is essentially a loan to a company or government entity, which agrees to pay you back in a certain number of years. In the meantime, they pay you interest.
· In comparison to stocks bonds are less risky than stocks because you know exactly when you’ll be paid back and how much you’ll earn. But bonds earn lower long-term returns, so they should make up only a small part of a long-term investment portfolio.
· A mutual fund is a mix of investments packaged together. Mutual funds allow investors to skip the work of picking individual stocks and bonds, and instead purchase a diverse collection in one transaction. The diversification of mutual funds makes them generally less risky than individual stocks. As mutual funds are handled by fund managers, you don’t need to drop a sweat.
· Like a mutual fund, an ETF holds many individual investments bundled together. The difference is that ETFs trade throughout the day like a stock, and are purchased for a share price.
· An ETF's share price is often lower than the minimum investment requirement of a mutual fund, which makes ETFs a good option for new investors or small budgets.
Your investment strategy depends on your saving goals, how much money you want to earn and the time duration you have in your mind.
If your savings goal is more than 20-30 years away (like retirement), you can invest all your money on quality stocks. But picking specific stocks can be confusing and complicated and if you are to investing. So for most people, the best way to invest in stocks is through low-cost stock mutual funds, index funds or ETFs.
If you’re saving for a short-term goal and you need the money within five years, the risk associated with stocks means you're better off keeping your money safe, in an online savings account, cash management account or low-risk investment portfolio.