So you have your emergency fund fully saved, you paid off your high-interest debt… Now let’s get into the fun stuff; Investing! Let’s talk about different type of investments in the stock market so you can decide which is right for you. We will stick to the basics for now, and we can cover more advanced investing in the future. Here are some things to know if you are just getting started in investing.
Although I love and believe in every product I talk about, I have to mention that some links on this page lead to affiliates which could result in compensation for me.
I am not a financial advisor and do not offer financial advice. This article is for informative purposes only. If you are seeking advice, look for a professional in your area.
Getting Started In Investing
Before we get into it, if you are thinking about an individual stock, I would recommend Robinhood. The free stock trades are an awesome way to save money. Even if you aren’t thinking of investing yet, you might want to take advantage of the free stock they give you. I know for a fact they give out stocks such as Apple and Ford. You don’t even have to add money to your account! Use this link and we’ll both get a free share!
When you hear stock market, your mind normally goes towards individual companies and shares, so let’s talk about them first.
Individual stocks are, in their broadest term, a piece of a company. No, you are never going to buy enough to take ownership of a company, but it’s a good method to think about when you decide to purchase shares. Would you buy this company? If you are investing in Tesla, do you see them being around years from now?
I tend to stay away from companies I’ve never heard of for this reason. I’m not saying you can’t be successful, but it is harder to keep track of these companies if you have no interaction with them.
Keep in mind stocks sell on the secondary market when you purchase them, and they work on supply and demand pricing. If I own Apple and I bought at $150, and the next person thinks its worth more, the price keeps increasing.
Individual Shares are considered risky so it is always good to diversify. If you owned Blockbuster in the past, because they pretty much had a monopoly on movie rental, after all, you could have lost all your money when they declared bankruptcy. In comparison, if that was only 5% of your portfolio, it wouldn’t have hit you as hard.
Bonds are money you are lending to a company, government, or other municipality. They pay a fixed interest over a certain amount of time. Keep in mind there is still risk involved.
When it comes to corporate bonds especially, you risk the company defaulting on bond payments (municipalities are not immune from this, but it is less common). There is also risk in rising interest rates. If you purchased a bond paying 2%, but interest rates rise, your bond becomes less valuable. If you wanted to sell the bond before maturity (the date that payments stop), you would receive less money than you purchased for.
Mutual Funds are a basically companies that do the diversification for you. You choose the level of volatility you like, and they purchase stocks and bonds to try to make that happen. The more aggressive you buy, the more stocks, in the fund.
Keep in mind there are fees to manage these, and different fee structures.
Class A: Usually the most common, they charge an upfront fee. For example, they might charge 4.5% of all the money you put into the fund.
Class C: They normally don’t charge (or charge very little) to purchase, but they charge higher yearly fees, meaning your return is lower than Class A. Keep in mind that although no upfront fee sounds great, it would be more expensive if you hold these over longer periods.
There are also smaller management fees that will always be charged within funds, but the stated returns are net those fees.
Funds also have ‘Fund Families’. This benefits you as you can change how aggressive you are at any time, without having to pay a load fee again. For example; if you bought a T Rowe price conservative fund, and decide you want to be more balanced, you can move without paying the 4.5% of the Class A fund again.
Think In Percentages
Whenever someone who has never invested asks me for advice, I ask them what their goal is. The answer is usually “to get rich”. It’s important to remember that the stock market is not a lottery, and you shouldn’t be looking at it as gambling. You are investing in companies that you believe will grow.
What makes it a successful investment? Well first, check what your savings account is paying you. If you can earn more than that with investments, then it was a good investment to make.
Investing Vs. Trading
I’ll repeat this again: you are not gambling. The stock market will have up and downs. Do you still believe in the company? If there something in the news that might affect the company in the long run? Use these to make your decisions.
If you are constantly buying and selling stocks, you are now trading and not investing. Did you know that 80% of day traders (traders who buy and sell multiples times through the day) lose money?
Time is your friend when investing. Use it to your advantage!
Buy Low Sell High
Buy low, sell high! Buy Low! Sell High! Repeat that phrase as it is easier said than done. At first, it seems like common sense, but fear and greed will play a major role in your investing methods whether you know it or not. If the market goes down, fear kicks in, if the market is great, greed will kick in. Knowing when to sell is not an exact science. You will NEVER time the market perfectly. That’s ok. Your aim is to make some money. If that means you held a stock for 6 months and didn’t see future potential in it, that’s okay! Even if keep rising after you sell, focus on the earnings you made! If you’ve been holding it for two years and think it’ll keep rising, that’s okay too! Hold on to it!
Know When To Cut Your Losses
On the other hand, if you were holding onto that Washington Mutual stock when there were reports of them going bankrupt, and you didn’t want to sell, well you lost a ton of money when they declared bankruptcy.
To Be Continued…
For the sake of cutting such a long read, we’ll keep talking about different investments in the future. Let me know if there’s something you’d like to hear about!
I’d also love to know how your investments are going in the comments!
Check out the rest of the Basic Steps to financial freedom.