How to Get Started Investing for the Absolute Beginner
Don’t know your asset from your elbow? No worries! Here’s a look at how to get started investing for absolute beginners—yes, even if you don’t know a nest egg from a chicken egg.
Are you thinking of buying a home? Sending a kid to college? Retiring in style? Having a nest egg handy for the future?
We all have financial goals. Investing can help us reach them. And while you might think that investing is the purview of Wall Street and the wealthy, the truth is that everyday people rely on investing all the time to achieve their financial goals.
Don’t know the stock market from the supermarket? No problem. You can get started in investing, even with a small starting amount. Here’s a look at how to get started investing for absolute beginners.
What is Investing, Anyway?
Investing is the act of allocating resources in much the same way you would allocate to a savings account. But unlike a savings account, investing is done with the explicit intention of generating income or profit. This is different from a savings account, where you drop money into a bank account and it stays the same.
Investing is not to be confused with an investment, which is an asset acquired with the intention of generating profit. An investment asset is a vehicle for investing, the means by which you earn a profit. Common types of investments include:
- Bank products
- Mutual funds
- Retirement savings accounts
- Commodity futures
- Alternative investments
- Complex assets
Because you’re taking a chance on growth, risk is a fundamental concept in investing, and it goes hand-in-hand with return. Low risk often means low returns, while high risk often means high returns (though not always). Keep in mind that risk and return can vary widely, even between two of the same types of assets.
So…How Do You Make Money in the Stock Market?
The most common way for investors to earn money is through the stock market. After all, stocks are the most well-known type of investment and they’re the simplest to handle.
Let’s say you buy a stock. How do you make money on it?
There are two ways to make money on a stock. The first way is if the stock you own appreciates in value, i.e. other investors decide the share is worth more than you originally paid for it. This might happen if the company performs well. Keep in mind that these are unrealized gains—even if your stock goes up in value, the only way you earn money is by selling it, thus locking in your gains. The art of investing is knowing when to buy or sell.
The other option is when the company that owns the stock issues dividends, a distribution of the company’s earnings to a certain group of shareholders determined by the company’s board of directors.
Most of the time, though, you earn money by selling stocks that have appreciated in value.
How to Invest Money to Make Money
Don’t know your asset from your elbow? No worries.
Broadly speaking, there are three types of asset classes:
- Stocks (owning a share in a business)
- Bonds and loans (money lending)
- Real estate (investment properties)
By far the simplest and most common way is to invest in stocks. At this point, you would either monitor the market to sell and buy stocks to learn on appreciation over time, or you would work with a professional service to manage it for you. Unless you’re an experienced investor or have the time to learn the ropes, most people are better served by the second option.
What is a Good Way to Start Investing?
While there are several types of investments on the market, the best way to get started investing always boils down to the same strategy.
First, you need to think about what you’re trying to achieve, as this will change the types of assets and accounts you’re likely to acquire. For example, if you’re saving for retirement, you would open a different account than saving for your child to go to college.
You also need to think about your level of risk tolerance. Keep in mind that the longer you invest, the more time you have to make up for risky investments if they don’t pan out. Either way, you have to think about what you’re comfortable with. Low-risk passive investing can work as well as high-risk active investing, as long as you choose the option that you’re going to use.
Second, think about how much you’re willing and able to invest, relative to your desired end goal. For example, if you’re hoping to save for retirement, you should generally plan on allocating 10% to 15% of your income each year (that includes matching employer contributions).
Based on that information, you can open an investment account. Keep in mind that many investment accounts will give you options to choose your investments—an employer-provided 401k, for example, will give you a selection of investment options to choose from.
Ready to Make Your Money Work for You?
Ready to plan for the future you want? Once you know how to get started investing, that future is within reach. So break out a pen and paper, think about what you’re trying to achieve, and you can get started working toward a brighter financial future. Oh, and if an exciting asset class that outperformed the S&P 500 by 180% from 2000 to 2018 sounds like the right fit for your financial future, we’re here to make blue-chip art accessible. Submit your membership application today to earn money on the world’s best masterpieces.