Starting an investment can seem daunting at first—what securities to consider and what to do first. The sheer number of investment options and the actual risk of losing money is enough to scare many people.
Ironically, the best way to save your money is by investing it. Still, it is common for people to develop cold feet when it comes to investing. Some may think they are too poor to invest; others believe it’s probably too late. The truth is that no one is ever too poor to invest. Plus, you can start investing at any time.
To make it easier for you, I have put together this investment guide for beginners. In this guide, I’ll explore securities to consider and what to do first. This ensures that you have the right mindset, education, and an array of investment opportunities to choose from.
Ready? Let’s get started!
Step 1: Clear Off Bad Debts and Stay Off Flamboyant Plans.
It might seem counterintuitive, but you should never begin any major investment until you have cleared off unnecessary debts. Unnecessary debts will eat up profits you get from investments thanks to compound interest.
However, not all debts are unnecessary. You can manage your home mortgage or student loans while building up your portfolio. Large credit card debts, on the other hand, are a no-go.
Speaking of credit cards, avoid making unnecessary purchases such as the latest iPhone, expensive cars, and the likes. These purchases will eat into your income and increase your liabilities. You should always avoid trying to “keep up with the Joneses.”
If you are going to be a good investor, you must learn to invest your resources in things that will yield long-term profit, not momentary satisfaction.
Focus on your investments, and soon you will be able to purchase whatever you want.
Step 2: Have a Backup Wallet
Before you start investing, set some of your money aside. This will serve as an emergency fund in case something happens. (Something as unexpected as the 2020 Covid-19 pandemic can happen. It is better to be safe than sorry.)
A backup wallet will ensure you have money to spend if you lose your income source and your savings are tied up in long-term investments. And that will allow you to invest with peace of mind.
Step 3: Start Small, Grow Fast
The best investors are habitual savers. This makes sense as you can only invest your savings. If you don’t have savings, you have no funds to invest with.
To get started, pick an amount that you can afford to spare every week or month, depending on your monthly income. You can start by saving $10 a week. It doesn’t seem like much at first, but after a year, it grows to over $480. And that is just saving $10 without investing! If you can afford to save more, please do.
You can use the traditional cookie jar or shoebox, or open an online savings account. Regardless of your choice, make sure you save regularly.
If you are looking for an excellent place to get started, try CHIME. They offer 1.00% APY for their savings account. There is no minimum balance requirement. Additionally, they have tons of extra features that you can check out here.
Investments come with different degrees of risks and rewards. While you can learn by making lots of mistakes, it’s cheaper, faster, and more fun to simply learn the basics.
In its basic form, investing is merely paying $5 for $10’s worth of value. It is all about valuing stocks, securities, and other investment opportunities. Ultimately, the goal of investments is to grow value.
To understand how investments work, you need to first invest in yourself. This means you should invest your time into becoming financially literate. There are tons of investing resources for beginners that explain securities to consider and what to do first. These resources include books, podcasts, online classes, and guides like this one.
Step 4: Create an Investment Plan
As you go through different investment resources, you will learn the various investment opportunities. The next step is to create an investment plan.
An investment plan is more than just choosing an investment option. It is a detailed outline of your financial status, money goals, how much you are willing to risk, and your investment choice.
To evaluate your financial status, make a list of your income, expenses, debts, and emergency funds (backup wallet). This will give you a clear idea of how much you can afford to invest. Some may be able to afford to invest 50% of their income; while others may only afford 5% to 10% of their income to other liabilities or bills to pay monthly. However, what you start with doesn’t matter as much as consistency. The goal is to invest what you can spare over a long period.
For your goals, ask yourself why you want to invest. It could be to build a house, start passive income, build generational wealth for your family, or raise money for your retirement. Your goals will influence how much you are going to invest, for how long, and how many risks to take. It will also give purpose to your investments.
All investments have risks. Your age and money goals will influence how many risks you can take. If you are 30 and investing in retirement, you can afford to take more risks than someone who is only a few years from retirement.
Types of Investment
For investment choice, well, there are many types of investments to choose from. There are three classes of investments that are recommended for beginners. They are:
- Stocks (also called equities)
- Bonds (also called fixed-income investments)
- Investment funds (ETF fund and Mutual Fund)
Other classes of investment are commodities and futures—oil or gold, alternative investments—foreign exchange (forex), real estate, cryptocurrencies, and collectibles. Additionally, there are Sustainable, Responsible, and Impactful investments (SRI) with a primary focus on beneficial social or environmental effects.
In the following sections, we will examine securities to consider and what to do first when you are ready to start investing.
Stocks are simply ownership shares of a company. When you buy stocks, you become a co-owner of the company whose stock you purchased. They are also called equities.
Stocks (or equity investing) is the most popular form of investment and attracts many investors. In fact, the stock market is the most rewarding investment opportunity as it allows you to benefit from any company of your choice.
You buy stocks at a share price. Some stocks are worth less than $10, while others are well past the $100 mark. The stock market grows at an average of 7% annually. Some stocks can double that rate.
How to Make Money Off the Stock Market
There are three ways to make money off the stock market. The first is to buy stocks so you can make a profit when the stock price increases. You can also trade options on stocks or stock indexes.
The third way is to benefit from stock dividends. Some companies pay dividends (a share of the company’s profit to people who hold their stocks. You can check dividend.com for information on companies that pay dividends.
How to Get Started on the Stock Market
There are two popular ways to invest in the stock market. The first is to buy stocks through a stock exchange. You can buy stocks on exchanges such as the Vancouver Stock Exchange (VSE) and the New York Stock Exchange (NYSE). The exchanges regulate the stock market and make it easy for people to buy and sell stocks. Another option is through an investment fund. This will be discussed later on in the article.
The second most popular option is to buy stocks via online platforms. Online investment platforms such as Public, Wealthsimple, and Robinhood make it possible for young people and beginners to purchase stocks with relative ease. The best part of this is that you don’t need to buy a “whole” stock. If the company’s stock sells at $100 and you have only $20, you can buy a fraction of the whole stock for $20.
In its most basic sense, a bond is a loan to the government or a company that agrees to pay you back after a specified period. Pending that time, you will receive interest on the loan. The interests are either paid semi-annually or annually until the bond’s maturity date. They are also called debt securities or fixed-income investments.
Bonds appeal to investors because of their low-risk nature. As far as investments go, bonds are the safest of them all. Suppose you buy bonds from a major country such as the United States. In that case, you can rest assured that the interest and repayment are guaranteed.
The downside to bonds is that they offer very little interest rates. Some government bonds offer as little as 2% per annum. This is a long but safe way to grow your money. Company bonds provide a much higher rate, but that is because their bonds carry more risks.
A government bond is trusted because everyone trusts that the government will remain steady for a long time. Not everyone expresses that same trust in companies.
If you have a considerable amount of money and a lot of time to spare, you can consider bonds. Buy a large amount, live off the interest payments (or reinvest them in other investment classes), and collect the principal at the bond’s maturity date.
Investment funds refer to investment portfolios that are managed by fund managers. These funds are created using a varying ratio of stocks and bonds and other investment classes.
With investment funds, you don’t have to worry about securities to consider and what to do first. The manager will do all that for you.
The drawback to this kind of investment is that the manager charges a fee. For most people, that fee may be too high. There are two kinds of investment funds: mutual funds and ETF funds.
A mutual fund is a collection of individual stocks and bonds offered to investors as a single investment. Rather than doing research on individual stocks and bonds, a beginning investor can simply buy a mutual fund.
Mutual funds have two advantages. First, they carry less risk because they are based on diverse investments instead of an individual stock. Furthermore, they save people the time and stress of doing research, buying stocks or bonds, and watching the investment grow. With mutual funds, you don’t have to worry about securities to consider and what to do first when trading.
In return, the investors pay the manager a yearly fee. While most mutual funds are managed by financial experts, an index fund—a type of mutual fund—tracks a specific stock market index’s performance, like the S&P 500. An index fund’s advantage is that it doesn’t need “financial experts” to make decisions, reducing the management fee.
An exchange-traded fund (also called an ETF fund) is a collection of individual stocks and bonds offered to investors as a single investment. It differs from a mutual fund because they can be bought and sold throughout the day and are sold for a share price.
It also has a smaller minimum investment requirement, making it ideal for beginners with a small budget.
ETF funds can contain a wide variety of investment portfolios, ranging from banking to healthcare to technology. Some ETFs focus on specific markets, such as commodities like gold and silver.
Step 5: Establish a Timeline
Investing is a means to an end. Whatever that end is, you need to set a timeline for it. Of course, events might happen that would shift the timeline forward or backward. Regardless, you need a timeline to help you establish your goals, budget, and your investment schedule.
To get started, write out your investment goals, how you intend to achieve them, and your ideal timeframe. Be realistic when you are drafting your timeline. If you are a few years away from retirement, create a plan that allows you to save as much as possible, and stop when you need the investment proceeds.
This article has explored the best securities to consider and what to do first when you decide to invest. In subsequent articles, we will explain these securities to consider in detail, offer more advice, and introduce other investment opportunities.