Are you reluctant to put your money into investment assets? You may think you don't have enough extra to invest or fear you'll lose all your money if you do. But investing doesn't have to involve a lot of cash or big risks.
What actually may be stopping you is that investing concepts and jargon can be confusing and intimidating—until you get familiar with them.
Take a few minutes to go through these investing basics so you're empowered and better equipped to make decisions about investing in a way that's right for you.
Reviewing basic investing terms
The more you know, the easier it can be to make sense of investing jargon.
Stocks
However small your slice of the pie, you technically become one of the company's owners when you purchase stock. The stock price reflects the value of the company and is determined by what investors are willing to pay to own a piece of it.
The rewards & risks of stocks
When you buy stocks, you're usually hoping for one of these outcomes:
- You receive a portion of the company's profits in the
form of a dividend (though not all companies pay dividends). - Your shares appreciate—meaning that you can sell them for a higher price than you paid for them.
However, stocks do come with risks. Even though various stock market indices—the S&P 500, Dow Jones Industrial Average and NASDAQ Composite—have
With this in mind, stocks tend to be a better fit if you have a long-term investment horizon. When you're building assets for a retirement that's decades away, a temporary dip in your portfolio's value might not throw you off track. You have time for the market to pick up again and potentially regain lost ground.
Bonds
The risks & rewards of bonds
Bonds are generally considered to be conservative. The interest rate on bonds is usually relatively low but fixed, and interest payments to bondholders are usually made once or twice a year for the life of the bond, making the earnings predictable. Their default risks also tend to be low—government bonds in particular have full faith and credit backing—making them more reliable than other investments.
However, bonds aren't without risk. In rising–interest rate environments, the price of bonds tends to fall. Plus, the interest you earn might not maintain its value during times of high inflation.
Mutual funds
A
The prices of mutual funds fluctuate each day based on market conditions and demand. Most mutual funds have some investment risk and volatility. If you're willing to accept ups and downs in your mutual fund's day-to-day price, you may experience long-term gains.
Learn more about different types of mutual funds
Exchange-traded funds (ETFs)
Like mutual funds, ETFs allow investors to purchase an interest in a diversified portfolio of securities. These might include
Most ETFs track the performance of a market index. For example, if you want to gain broad exposure to large-cap U.S. equities, you can buy an ETF that invests in most or all of the securities in the S&P 500 Index.
Real estate
Real estate investing can require a lot of time and effort to find the right property and handle it effectively. Real estate investments also are subject to market fluctuations. There's always a risk that the value of your investment could go down.
Despite these risks, real estate remains one of the most popular types of investments. It can be a good option for people who are looking for a long-term investment and have the time to put into it.
Asset classes
An
You may be most familiar with the
Asset allocation
Diversification
An example of diversification would be investing in a variety of stocks from several different small companies instead of allocating your entire stock investment to one small company.
How are asset allocation & diversification different?
Asset allocation and diversification are both investment strategies, but the key difference is that asset allocation is the percentage of stocks, bonds and cash you invest in while diversification is about spreading your investments among the asset classes within your
While asset allocation and diversification can help reduce market risk, they do not eliminate it. Diversification does not assure a profit or protect against loss in a declining market. That's why many investors choose to work with a financial advisor they trust who can guide them to make better decisions with considerations based on their investment goals, time horizon and risk tolerance.
Dollar-cost averaging
When you put in the same amount every time, you buy more shares when prices are lower and fewer shares when prices are higher. This tends to result in a lower average cost per share. With steady commitment over the long haul, you're counting on these cost differences and earnings fluctuations ultimately averaging out and, hopefully, ending up ahead.
Dollar-cost averaging doesn't guarantee you'll make a profit, but it can remove some of the guesswork and stress of making investing decisions.
Risk tolerance
But that's only if you can handle the risk. And age isn't necessarily a factor in your ability to stomach market volatility. If you know you might worry during normal volatility, factor that in when choosing investments.
Since risk is part of investing, it's important to understand your tolerance for it. The good news is that investments offer a spectrum of risk levels, which allows you to make choices that best match your comfort zone.
Liquidity
Here's how liquidity applies to different investments:
- Cash: The most liquid asset, readily convertible into goods and services.
- Stocks: Generally considered liquid, especially for common stocks traded on major exchanges. The higher the trading volume, the easier it is to buy or sell shares quickly.
- Bonds: Can be liquid but may depend on the specific bond and market conditions. Government bonds are typically more liquid than corporate bonds.
- Mutual funds and ETFs: Relatively liquid, but share prices can fluctuate, and some funds have redemption fees that can affect your return if you sell shortly after buying.
- Real estate: Not very liquid at all. Selling property takes time and involves transaction costs.
FAQs: Common investing concerns
It may help you feel less intimidated about investing if you know that other people have the same questions as you. Here are some of the top questions people ask when they're considering investments:
What if I don't have enough money to invest?
Generally, you can start
Bimonthly investing can be a smart strategy for beginners, particularly if it aligns with when you receive your paycheck. It fosters a consistent savings habit, makes budgeting easier and allows you to benefit from dollar-cost averaging.
Some investors want to spend hours poring over data in search of hidden treasures. Others climb aboard the bandwagon of the latest investment fad. Those investors pay fees, and so will you.
Simply put, investing costs money. There are fees tied to transactions you make, advice you might pay for, and the products you buy. For example:
- Fund companies charge an
expense ratio to shareholders every year to cover administrative and operating expenses on their mutual funds. Cost basis , which is the original value or purchase price of an investment, is something you need to think about if you're selling your investment because you may betaxed on any gains .
Generally, the longer you hold your investments, the more time they have the potential to grow, which can help offset the fees you will pay. Your financial advisor can help you understand the fees associated with investing and develop strategies to reduce them when possible.
What happens if I'm not happy with how my investments are performing?
Investing your money is not a set-it-and-forget-it strategy. There are risks, the markets do fluctuate, and your goals may change. For these reasons and more, it's wise to review your investments at least once a year to understand how they're performing. When needed, your financial advisor can help you with
How can I avoid market volatility?
Successful investing takes time. You begin, track your results and gradually increase your commitment as you learn more. It's important to get started and be consistent while realizing there will be
For example, if you want guarantees, you may sacrifice potential earnings. You could choose to defer taxes, or you might be focused on beating inflation. No matter which investments you pick, there will be tradeoffs.
When it comes to investing, you don't want to be emotional. If you get anxious or unsure when looking at your returns during market fluctuations, you might panic and sell off investments just before they start to bounce back.
That's why it's important to think about
What types of accounts are available for me to invest in?
Here's a breakdown of potential account types for beginner investors:
Retirement-focused accounts
- 401(k), 403(b) or 457(b)(. If offered by your employer, these
retirement accounts are excellent options. Contributions often are deducted before taxes, lowering your taxable income. Many employers offer matching contributions, essentially free money to boost your savings. However, these accounts have contribution limits and restrictions on when you can access the funds.
- Traditional IRA or Roth IRA. IRAs allow you to contribute your own money (up to IRS limits) and potentially enjoy tax benefits on your earnings.
Traditional IRAs offer tax-deferred growth, meaning you don't pay taxes on contributions or earnings until withdrawal in retirement.Roth IRAs offer tax-free growth and withdrawals in retirement if you follow contribution rules.
General investment and savings accounts
Brokerage accounts. These accounts allow you to invest in a wide range of assets like stocks, bonds, mutual funds and ETFs. You have more control over your investment choices than with retirement accounts, but contributions are typically made with after-tax dollars, so there are no tax advantages on earnings.
High-yield savings accounts. These offer a slightly higher interest rate than traditional savings accounts but are not suitable for long-term investing due to lower returns than stocks and bonds. They can be a good fit for emergency funds or short-term savings goals.
Certificates of deposit (CDs). With these, you can lock in your money for a fixed term in exchange for being paid a guaranteed interest rate. They offer more stability than a savings account but limit your access to the funds during the CD term.
Remember, the best account type depends on your investment goals, time horizon, and risk tolerance. Consider consulting with a
What's a reasonable amount for me to invest?
The reasonable amount for beginners to invest depends on several factors, but here are some general guidelines:
- Start small. It's wise to prioritize building a consistent savings habit over a large initial investment. This allows you to get comfortable with the process and learn about investing before committing bigger sums.
- Consider your budget. Ideally, your investment contributions shouldn't disrupt your financial stability. Factor in your essential expenses, debt obligations and emergency fund before allocating funds for investing.
- Bimonthly contributions. A common strategy is to invest a set amount bi-weekly or monthly, aligning with your paychecks. This automates the process and can make it easier to stick to a budget.
Here are some potential starting points based on your income:
- Low income. If you have limited disposable income, even biweekly contributions of $25-$50 can be a great start. Many investment platforms now offer fractional shares, allowing you to invest smaller amounts in various stocks and funds.
- Mid-range income. With a more comfortable income level, consider investing 5%-10% of your paycheck. This is a good balance between contributing consistently and ensuring you meet your other financial needs.
- High income. If you have a higher income, you might allocate a larger portion (up to 15% or more) toward investing but prioritize building a solid emergency fund and
managing any high-interest debt first .
These are just starting points. The most important thing is to develop a
Before investing, set investment goals
As a new investor, navigating the world of stocks, bonds and mutual funds can feel overwhelming. Before diving in, take a step back to define your goals. Having a thought-out roadmap will guide your investment choices and can keep you motivated over the long term.
Here's are three key areas to consider for your investment goals:
1. What is your purpose?
Before you start investing, consider how and when you intend to use the money. Let's say you're saving and investing for your child's college education. How you invest your money can depend on whether your child is a toddler or a teen. Your plans for the money should determine how you invest it. This will help you narrow down investment choices.
Setting a goal can give shape to your plans and make it easier to hold yourself accountable.
2. What is your time horizon?
Time horizon refers to the amount of time you have before you need your invested money. This directly impacts the level of risk you can take. The longer your time horizon, the more time your investments have to potentially grow and recover from market downturns.
Younger investors often have a longer runway for their money to grow. They may be able to invest in riskier assets that offer potentially higher returns, knowing that if it doesn't work out, they still have time to recover. But if, for example, you're investing for your retirement, your time horizon is continuously getting shorter. As you age, and your time horizon shrinks, you may need to shift your focus toward more stable investments that preserve your capital as you move from long-term investing to short-term investing.
3. What is your risk tolerance?
Some investors prioritize stability and are comfortable with lower returns while others don't mind some volatility (ups and downs in investment values) in exchange for the chance of higher growth.
Be honest in assessing your risk tolerance. If you lose sleep over daily market fluctuations, a conservative approach might be best. However, if you have a long-time horizon and can stomach some short-term dips, you might consider incorporating riskier assets for potentially greater returns.
Your risk tolerance likely won't stay the same during your lifetime. As your financial situation evolves, schedule time regularly with your financial advisor to revisit your goals and adjust your investment strategy as needed.