Investing is not a get-rich-quick scheme. It takes understanding and knowledge about the risks and rewards before getting started. It’s important to read everything you can about investing before you begin so that you are prepared for potential pitfalls. It is clear, however, that investing is a good way to secure your future. Regardless of the rise and fall of stock markets over time, the average return on investment is still hovering around 11 percent over 20 years. That’s not bad.
To get started investing, there are a few investments that are better for beginners. But before you get started, be sure that you understand the risk of any one investment and read all the fine print. Plus, before investing one dime in anything, you should invest in yourself by having at least 8 to 12 months living expenses saved that you can get to easily. Once you do that, you’re ready to start investing.
There are four basic types of investments: stocks, bonds, mutual funds and so-called alternative investments which consist of real estate, options, and other things beginners don’t need to concern themselves with at this point. Instead, focus on the three basic investment options:
* Stocks – When you buy stocks, you’re buying equity in a business and in fact you become part owner of the business in which you buy stocks. They are very volatile and whether any payout (called dividends) will happen or not is a risk you must be willing to take. The risk is that you can lose every penny you put in.
* Bonds – These are fixed income securities in which you are lending money to the entity and in return you get a return on investment in the form of interest payments. These are relatively safe investments and if you buy government bonds they are risk free. But, due to their lack of risk you won’t make as big of a return on your investment.
* Mutual Funds – Consisting of both stocks and bonds, you essentially pool your money with a group of other investors so that a professional manager will run the fund and decide which stocks and which bonds to buy with the fund. Typically when you buy a mutual fund you choose which fund to buy based on the year you intend to start using the money. You don’t really need to know much about investing to choose mutual funds, and you can start with very little money.
Bonds and mutual funds are the easiest to get involved with if you are a beginner investor, and you can start with relatively small amounts of money.
To buy bonds you will need to find a full service or discount brokerage firm, or if you have at least $5000 you can work with a bond broker. To buy a mutual fund you can go through an investment firm like T. Rowe Price, or check with your credit union or bank. For mutual funds through a bank or investment firm, you can start with $100 or less.