Investment is important to your financial security, in short, it is the pillar of wealth building. However, although many people have this knowledge, they sometimes tend not to act on it - or maybe not act out rightly.
Two popular misconceptions about investing are that you need a lot of money to begin and secondly, you need thorough skill to begin. However, these days investing is becoming more simplified to allow beginners to thrive and yet start with almost what they have.
In this guide to investing for beginners, you'll see 4 major ways you can start investing as a beginner.
#1. High-Yield Savings Accounts
A high-yield account is a safe place to start investing for beginners, especially when you are saving for something specific or just keeping an emergency fund.
This savings account allows your money to grow as it offers higher interest rates than standard savings accounts. And, you can have access to your money anytime.
#2. Retirement Plans
Another tip for investing for beginners is to take advantage of retirement plans to invest in your future and have substantial savings at retirement. This is also one the easiest ways of getting started in investing for beginners as most times the investment is transferred directly from your paycheck.
Examples of these retirement accounts in the UK are SIPPS or in the USA are the traditional 401(k) where your contributions are pre-taxed and grow tax-free until retirement age. In a Roth 401(k), you make after-tax contributions and you won’t pay taxes while withdrawing during retirement.
#3. Consider Investing in Funds
The major reason investors choose to invest in funds rather than individual stocks or bonds is diversification. Funds allow you to combine several investments in one single investment.
In addition, investing in funds offers you a low-cost investment (so you can have more returns) while increasing your chances of strong long-term returns. Some major types of investment funds that are appropriate for beginners include:
● Mutual Funds
Mutual funds allow you to invest in a basket of stocks or bonds or any other asset class. You can track the performance of the stock in the index to execute profitable trade.
A notable example of a mutual fund is the S&P 500, which comprises roughly 500 of the largest companies in the U.S. Mutual funds are actively or professionally managed, this means that an investment professional manages a mutual fund.
● Index Funds
Index funds track a market index. A market index is a portfolio or selection of investments that represent a fraction of the financial market. Investing in Index funds takes a passive approach rather than professional portfolio management.
They track the performance of an index and therefore tend to attract less feel (expense ratio) than mutual funds.
Also, some Index funds have minimum investment requirements, but some brokerages such as Charles Schwab and Fidelity allow you to invest less than £/$1000.
● ETFs
Similar to mutual funds and index funds, exchange-traded funds (ETFs) are also a type of investment fund that holds a variety of securities. ETFs track an index, commodity, sector, or other assets.
However, in contrast to mutual funds, just as the stock they trade throughout the day and also tend to have lower fees.
The minimum investment requirements for ETFs are usually lower than that of mutual funds. You can buy ETFs for as low as the cost of one share, so most likely below £/$1000, then plus any associated fees or commissions.
However, thankfully, most brokers now charge $0 trading costs for ETFs.
#4. Using Investment Apps
Investment apps have made investing for beginners less stressful as most of them target new investors. They can teach you how to build your portfolio and even manage your investment for you. Examples are eToro, Acorns and Stash.
Important Considerations in Investing for Beginners
● Financial Goals
Generally, a goal serves as a guide for your activities, ensuring that they both align. Setting a goal financial, both short- and long-term goals helps you develop a concrete plan for your income; how to spend it.
● Your Risk Tolerance
Your risk tolerance as an investor refers to how much risk you are willing and able to handle. Some investments especially stocks are volatile and thus risky, you need to know if you can deal with it before committing your money.
● Active or Passive Investment
Another important consideration in investing is whether you want a passive or active investment. The active portfolio focuses on outperforming the market, therefore it uses the services of a professional investor to optimize investment.
On the other hand, the passive approach is more interested in buying at a lower price to sell higher - that is for profit.
● How to Manage Your Investment
You should also decide whether you want to manage your investment yourself or hire a financial advisor/Robo-advisor to help you. The latter may cost you more because a broker collects a commission for their services.
Investing for Beginners - Conclusion
As a beginner, you can make profitable investments if you understand the rule that guides the game.
With this guide to investing for beginners, you can start investing the right way and probably launch into tougher investment types as your knowledge about investment grows.