Investing for Beginners: How to Get Started
September 5, 2019
Investing. The word can be enough to make people shiver. The old-timey notion is that investing is reserved for the rich and those on Wall Street, and that the average Joe just doesn’t know enough about the stock market to invest. We’re here to tell you that isn’t true. Investing doesn’t have to be scary, doesn’t have to be expensive, and doesn’t have to be complicated. With a little bit of knowledge and research, you can feel prepared to begin your journey into investing.
But first, what is investing?
At its simplest, investing is trading some of your money today so that you can have a lot more money tomorrow (well, in the future).
This is important because for most of us, putting our money into a savings account won’t earn us enough money for retirement or other large financial goals. Investing money allows us to grow our money faster by taking advantage of compound interest.
Now you understand why investing is a good idea, but you still need to understand how you can get started. It helps to understand that there are four main types of investments: stocks, bonds, funds, and retirement plans. Let’s look at each investment type more closely.
Stocks are shares of a company (small pieces of ownership). When you buy them, you then become a part owner of that company. It’s important to know that a stock is attached to the company it’s from, meaning that if the business is doing well the value of its share will go up, but if the business is doing poorly then the value of its share will go down. Due to stock volatility they are often considered a riskier investment.
Bonds are also a type of stock market investment, but they work differently than stocks do. A bond isn’t a share of a company, rather it’s a debt owned by either a corporation or a government (and it’s more often the latter). When investing in a bond, you are basically lending the corporation or government your money. In return, you are promised repayment of your money plus interest.
Bonds are commonly referred to as “fixed-income” assets because they are repaid after a fixed amount of time at a fixed rate. This stability makes bonds a much less risky investment opportunity, but it also limits their potential for growth. This is something to invest in if you’re looking for long-term, stable gains, but understand that you won’t make as much money as you might with other investing opportunities.
An investment fund is capital belonging to multiple investors (like yourself), that is used to collectively purchase stocks and bonds. With an investment fund, however, there are many investors pooling their money together, each investor keeps ownership and control of their own shares. There are a few different types of funds that exist out there.
1. Target-Date Mutual Funds
A target-date mutual fund is a retirement investment (don’t worry, we’ll talk more about those later). A mutual fund is like a gift basket filled to the brim with a variety of investments (stocks, bonds, and others), and a target-date mutual fund is one that automatically invests with your estimated retirement year in mind. Investing in a mutual fund makes it easy for investors to diversify (read: invest in many different areas) without doing all of the research on individual stocks and bonds.A mutual fund is overseen by a professional manager who typically chooses how the fund gets invested, based on various parameters or themes. For example, a U.S. equity fund will invest in U.S. stocks, and the Rowe Price Japan Fund invests in companies with primary operations in Japan.
2. Index Funds
An index fund is similar to a mutual fund, but there is no professional manager that maintains the fund’s investments. Instead, the fund tracks a market index, such as the S&P 500, and aims to mirror the performance of that index by buying stocks in it.Since there isn’t a professional managing the investments, they tend to charge lower fees than mutual funds, and they often have a lower minimum investment. Depending on where you get your index fund there might not even be a minimum investment requirement.
3. Exchange-Traded Funds (ETFs)
An exchange-traded fund is a bit of a hybrid index fund. Being a fund, they are comprised of different types of investments (stocks, bonds, etc.), and similar to an index fund, they typically track a market index and tend to have lower fees. The major difference, however, is that ETF’s are traded throughout the day, similar to stocks. This makes them more ideal for those looking to play a more active role in their investments.There are no minimum investment requirements, but it’s important to know that many brokers charge a commission to buy or sell them. There are brokers who have a commission-free ETFs, which is the ideal choice if you intend on investing in an ETF regularly.
A retirement plan is exactly what it sounds like – a plan that helps you save for retirement. We’ve already touched on one retirement plan option (mutual funds), but there are a few more options that are worth noting.
1. 401(k) Plans
A 401(k) is a retirement plan that is sponsored by an employer. This plan allows you to contribute part of your pre-tax paychecks to the account. In some cases, an employer will match a portion of your contributions (which is an offer that you should definitely take advantage of!). Most 401(k) plans offer a variety of mutual funds to invest in (see how it’s all coming together?).It’s important to know that there are restrictions on when you can access the money in your 401(k) plan, as well as on the total amount of money that can be put into one. If you withdraw funds from your account before you turn age 59 ½, you’ll be subject to a 10 percent tax penalty. Additionally, you cannot add more than $19,000 to your 401(k) in a single year. It is also important to know that while the money put into the account is pre-tax, you will be subject to paying taxes on your money when you withdraw it from your account.
2. Individual Retirement Accounts (IRAs)
Another retirement plan is the individual retirement account (IRA). These are a good option for people whose employers do not offer a 401(k) and/or for those who max out their 401(k) contributions in a year. With an IRA you can invest in any of the aforementioned investment opportunities, and you make the investment decisions yourself (unless you hire someone to do it).There are restrictions with IRAs as well, though some of them differ from 401(k) restriction. With an IRA you can contribute up to $6,000 in a year, and this number increases to $7,000 if you’re age 50 or over. You don’t pay any taxes on your contributions, but similar to a 401(k), you will pay taxes on the money when you withdraw Also similar to a 401(k), you will be subject to a 10 percent tax penalty if you withdraw your money before you turn age 59 ½.
3. Roth IRAs
A Roth IRA is a specific type of IRA whose contributions are made after taxes are taken out of your paycheck. The upside to this type of account is that even though those contributions are initially taxed, the money within the Roth IRA is never taxed again. This means that when you withdraw money from your account, you won’t be subject to paying taxes on it. Another difference between the two is that with a Roth IRA, you can withdraw your contributions at any age without the 10 percent penalty as long as five years have passed since your first contribution.When contributing to a Roth IRA, keep in mind that if you also have a traditional IRA your contributions to both cannot exceed the $6,000 limit. If you only have a Roth IRA, that $6,000 limit still stands.
Now that you have a better idea of your investing options and how each one works you can take your first step into the world of investing with a little less fear. When you understand what it means to invest, the process becomes a lot less scary.
At Illinois Lending we understand the importance of investing in your future. We also know that the thought of investing might seem improbable if you’re low on funds. We want to help. Consider talking to one of our experts about your options and learn about the different loans we offer that you may be able to use to begin your investing journey.