Ultimate Beginners Guide to Investing
Most people think investing is a complicated structure that requires in-depth analysis and numbers.
It doesn’t help the media portray the financial industry and stock market negatively, and the education system doesn’t teach finance in high school.
The beginners guide to investing will cover what you need to know about investing and where to start.
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A global survey conducted by the S&P 500 shows America isn’t among the top financially literate country. America ranks 14th among 78 countries.
About 57% of Americans understand financial literacy, while 43% of Americans struggles or haven’t learned financial terms.
Understanding financial literacy helps sets you up to be financially successful with your investments.
However, thanks to the accessibility of the Internet and media platforms like YouTube, people can start learning personal finance and investing for free without enrolling in school.
The problem is people are not motivated to learn finance or investing because of how boring or dry the context is for beginners.
What they don’t understand is the benefits of building wealth for the future and see how much they can make through investing.
By not learning and implementing investing sooner, you’ll miss opportunities to increase your investment returns.
In 2019, the financial services industry was worth 23 trillion dollars and will continue to increase as businesses grow and innovate for consumers.
A 2018 retirement study done by Transamerica Center found that 73% of retirees regretted not investing/ saving more money for retirement.
About 64% of retirees wished they had more knowledge about saving and investing for retirement.
The reasons why retirees didn’t invested or save more was because 50% of them waited too long to be a concern with saving or investing, and 47% of retirees couldn’t save enough due to high amounts of debt.
Now that you understand the importance of investing, we’ll cover how you can start investing without any experience or education.
Ultimate Beginners Guide to Investing
Table of Contents
What is Investing & Savings
People often use the words investing and savings interchangeably, but there is a big difference between the two.
Investing
Using resources, often always money, with the hope of generating more money in return or another resource.
Examples:
- Buying stocks and hope the stock value will increase more than the original purchase amount.
- Spending money on marketing with the hope more people will see the ad and purchase their product or service.
- Buying new equipment to improve food quality and make more food for customers.
Savings
The amount of money left after spending and set aside for future use, often within a few years.
Examples:
- Money set aside to buy a house, car, education.
- A business plan to open another store soon.
- Money set aside for emergencies only due to unexpected outcomes.
Type of Investments
Stocks
Represent the ownership of a company. You buy a stock through online brokerage services and can be purchase at the current market price, or you can set it to a specific price when the stock price reaches that particular amount.
Two ways to profit on a stock investment is through capital appreciation or dividend income.
Capital Appreciation – Sell for more than the initial purchase price.
Dividend Income – Some companies will give out money if they offer dividends, and it’s calculated based on the dividend yield and how many shares you owned. Typically every quarter, dividends are paid to shareholders.
Stocks are high risk, high reward investment as the stock price can easily change at any moment.
You have the opportunity to receive a large investment return that’s greater than your purchase price, but the downside is the stock value can drop lower than your purchase price.
Bonds
Bonds are a form of debt investment that is issued by the government or corporations. You give money for the government or corporation to borrow, and in return, you’ll receive interest semi-annually.
You will receive the money they borrowed at the end of the maturity that’s issued on the bond. However, you have the option to sell the bond before the bond matures for more profit.
The value of a bond is affected by the market interest rate. As interest rates increase, then the bond price decreases, and vice versa.
Interest rate changes will not apply if you decide to hold a bond until maturity. It applies when buying or selling bonds.
Factors that Affect Bonds:
Maturity/ Duration: Bonds with longer maturities have a higher interest rate. Shorter maturities have a lower interest rate.
Credit Rating: The risk you will not be paid interest or repaid your borrowed amount on time or the entity defaults. Lower credit ratings will offer a higher interest rate for this risk.
A higher credit rating will have a lower interest rate but will more than likely repaid the borrowed amount and the interest rate made on time.
Bonds are low-risk investments as they are very regulated to help investors receive their interest and initial investment back from organizations.
However, in some cases, there can be defaults by organizations, but rarely.
Often you must invest at a minimum of $1000 to buy a bond. Organizations need high amounts of capital to fund their business and won’t accept small amounts of money for a debt investment.
Mutual Funds
A mutual fund is a collection of securities under a fund that an investor can purchase as one share.
Mutual funds have a portfolio manager to pick the best securities based on the investment objective of the fund. A mutual fund can either be passive or actively managed.
Passive Manage: Choose securities that are of an index. Common indexes are S&P 500, NASDAQ, or NYSE.
Actively Manage: Portfolio managers choose securities that best fit the investment strategy for the fund. The fund doesn’t follow an index, and the portfolio manager will use their best judgment to buy and sell securities for the fund.
Passive mutual funds have lower fees due to copying securities of an index. Active mutual funds charge higher fees for the portfolio manager’s work of doing more research to pick the best securities for the mutual fund.
The price of a mutual fund is called Net Asset Value (NAV). The NAV doesn’t display until the end of the trading day. You will buy mutual funds during the trading day, and the NAV is the investment price you will pay.
Exchange Traded Funds (ETF)
Similar to mutual funds as ETF is a collection of securities under one fund, in which an investor can buy shares of the ETF.
Almost all ETFs are passively managed and have low fees. Although most ETFs won’t charge commissions and you will only pay for the operational expense fee.
One big difference that separates ETFs from mutual funds is an ETF trades in real-time like a stock.
You make purchases on an ETF during trading hours, and the price will change throughout the day. While a mutual fund price only displays at the end of the trading day, and you must purchase it beforehand.
Certificate of Deposits (CDs)
Certificate of deposits is a debt investment where you invest your money in the bank. The bank will hold onto the money for a certain period and will give you interest that’s higher than their savings account.
The longer you let the bank hold onto your money, the higher the interest rate will be. However, if you choose to withdraw from the CD account, then you’ll be charged a withdrawal penalty fee.
A CD is a near no-risk investment as the bank rarely defaults, and the Federal Deposit Insurance Corporation (FDIC) will insure up to $250,000 to the bank’s customers if the bank defaults and fails.
Cryptocurrency
Crypto is a new form of investment that invests in digital money. Cryptocurrency is used as an alternative form of online payment without any government or centralized bank to control the currency.
Ownership and transfer of cryptocurrency are secured by cryptography or block-chain to prevent the same digital money and prevent fraudulent activities.
A database stores the transaction in a network distribution to identify any tampering and have safeguards against cyberhackers.
The value of the cryptocurrency is based on the market value and will continue to change. You purchase cryptocurrency in the same manner as buying stocks in the market.
Cryptocurrency is used to make purchases on platforms that accept them. When making purchases, you can break cryptocurrency value as a percentage or decimal from one crypto.
Examples of Cryptocurrency:
- BitCoin = BTC
- Etherreum = ETC
- Ripple = XRP
- Litecoin = LTC
The reason why there are many cryptocurrencies is because of what’s is used for payment. Some companies won’t accept Bitcoin as payment but will accept another cryptocurrency.
Each cryptocurrency has a specific purpose for its use. Cryptocurrency is more volatile than the stock market. It’s a very high risk very high reward form of investment.
Other Investments
There are other investments, but they are more advance. Beginners should not try the listed investments below until you understand how it works, and you are comfortable with the possibility of high losses.
If you don’t know how these investments work, then you can be lock into a contract that can set you back thousands of dollars back or more. Be careful and know what you’re getting yourself into before you invest.
Advance Investments:
- Options
- Commodities/ Futures Contracts
- Annuities
Risk Tolerance
Risk tolerance is the ability to accept the possibility of losses when you invest. Everyone has a different type of risk tolerance as some people cannot stomach losing value on their investment.
To determine your risk tolerance often, financial advisors will ask questionnaires to assess you. Questionnaires aren’t perfect to find out your type of risk tolerance, but it can give you an insight.
Seek a financial advisor for a more accurate measurement of your risk tolerance. You can assess yourself by reviewing the questionnaires below financial advisors may ask you.
Risk Tolerance Questionnaires Link:
You can assess yourself on your risk tolerance based on these factors:
- Financial Situation – The more money you have available, the more you can increase your risk tolerance.
- Investor Type – How do you feel when you see your investment fluctuates?
- Asset Class Preference – Do you have a preference for your investment?
- Debt investments are low risk and low return.
- Equity investments are high risk and high return.
- Time Horizon – How long are you willing to hold your investments as it fluctuates?
- Investment Goals – What is the purpose of your investment?
- Long-term: Save for your kid’s college, Marriage, Retirement
- Short-term: Vacation, Expensive Cars, Better Housing
Categories of Risk Tolerance
Aggressive: Can accept high risk with the potential for high returns.
Investment volatility doesn’t affect their judgment and can hold an investment for long-periods. Typically invest in equities with little to no debt investments.
Moderate: Mixture of equity and debt investments that focus on mid-risk for mid-return.
This category accepts taking on risk but has debt as a backup investment if the market downturns. Often 50% is allocated into equities and the other 50% into debt.
Conservative: Will accept low risk for low return on investments. Investments remain stable with little to no risk of losing investment value, but, in return, the investment gain is low.
Investors in this category choose to avoid losing investment value than receiving potential high returns. Debt investments are the primary source of investment.
Brokerages
There are many brokerages available for investors to enroll. Below is a list of brokerages best suited for a new investor.
Fidelity
Fidelity is a good start for investors as most of their investments are $0.00 commissions, stock trades are available, and provides research tools to assess an investment.
They have a very high reputation for customer service and educational resources for new and advanced investors.
Over 32 million use Fidelity for their investment, and they manage up to 8.2 trillion of customer assets.
Vanguard
Known for low-cost and commission-free trading for most trades and holds one of the largest selection of mutual funds and exchange-traded funds.
The company encourages long-term holding for their customers to grow their wealth.
Over 30 million use Vanguard for their investment and manage up to 6.2 trillion of customer assets.
Charles Schwab
Similar qualities as Fidelity as most of their investment costs are low cost or free, high level of customer support, and quality research tools.
Unlike the other two brokerages, Charles Swab has robo advisors to automate your investments.
Over 28 million use Charles Swab for their investment and manage up to 6 trillion in assets.
Overall, all three brokerages are good choices for beginners. It comes to your preference on which one you like the most after reviewing more about each one.
Investment Accounts
Investors have the option to enroll in different types of investment accounts.
They each have their pros and cons, but the simple approach for new investors is to enroll in a standard brokerage account and retirement account.
Standard Brokerage Account
Anyone can open a standard account and are free to add most types of investments into the account the brokerage has to offer.
The downside is you will be taxed when buying and selling.
Taxes in a standard account can be lower depending on how long you keep the investment in your account without selling it.
Long-term: Taxes are lower if you keep your investment for more than one year after the purchase date. The tax rate will either be 20%, 15%, or 0%, depending on your level of yearly income and filing status.
Short-term: Taxes are higher if you sell your investment before one year after you purchase your investment. The tax range is between 37% – 10% depending on your level of yearly income and filing status.
For taxes to apply, you must be making capital gains or a profit based on the amount you invested.
If you sold your investment at a loss and your overall investment is less than the original value, you can claim a net loss of up a maximum of $3000 on your taxes. You will claim a capital loss on your investment.
Capital loss applies for the current year you incurred a loss. If you happened to have a loss of more than $3000, then the remaining amount will carry over to the next year. You cannot apply more than $3000 to reduce your taxes each year.
Retirement Account
Focus on building wealth for the long-term and helps you prepare for retirement when you are unable to work and have a flow of income to support you.
You’re able to add most types of investments the same as a standard account, but the main benefit is the reduction of your overall taxes for contributing to a retirement account.
However, you can’t profit until you meet some eligibility. Otherwise, if you choose to sell off your investment before meeting the eligibility, then you’ll face a penalty of up to 10%.
Two type of retirements an individual can open are IRA and Roth IRA.
Individual Retirement Account (IRA)
The advantage of an IRA is the money you contribute is reduce from the taxes you owed of the current year you contributed.
When you withdraw from the account, you will be liable for the taxes that need to be owed based on the amount for that year.
Roth IRA
A Roth IRA is similar to an IRA, but the money you contribute to the account is already tax for the year with your tax files.
However, when you withdraw from the Roth IRA account, you will not owe any taxes because you already paid your taxes.
Requirements for both IRA and Roth IRA changes each year as both limits the maximum amount you can contribute, age requirement, and other exceptions.
Refer to the IRS website to stay up to date on any changes for your retirement accounts.
There are other retirement plans such as 401k, 403b, 457, SEP IRA, and others, but employer-sponsored.
You must be employed or self-employed to receive these retirement plans. Review your employer retirement benefits for more details.
Investment Goal
When it comes to investing you, must keep in mind how you will use your investment money.
You will need to reflect on your financial situation and plan out what you want in the future.
Instead of setting a board goal like to retire by 60 or set money aside for my children’s college. Set specific goals for your investment goals.
Create SMART goals to help plan out your investment goal. SMART goals are an acronym design to manage yourself to reach an objective using time and resources.
If you can specify your goals and the actions you will take, then more likely you’ll achieve that goal.
- Specific – Create specific goal (What’s the reason for your investment?)
- Measurable – How can you prove you’re making progress towards your goals (Amount of money invested)
- Attainable – Is it a realistic goal given the time frame? (Set a reasonable investment amount you want to reach)
- Relevant – Is this something you want or someone else’s goals? (Using your money instead of someone else’s to invest)
- Time based – Create a realistic time line on when the goal is reached (Use age as a time measurement or specific year)
Common investment goals investors set up:
- Retirement (Long-term of +10 years)
- College Tuition (Long-term of 5 – 10 years)
- Opening a Business (Long-term/Short-term, Varies on Business)
- House (Long-term of 5+ years)
- Material Items: Car, Boat, New Technology (Short-term of less than 5 years)
Keep track and adjust your investments based on your goals and financial situation. There are other investing tips you can learn to help set up your financial portfolio.
If you have a plan and consistently contribute to your investments, then you’ll be better off financially in the future.
Closing Thoughts
Investing isn’t as complicated as been told to be. You don’t have to watch the stock market every day or learn complicated financial formulas to succeed in investing.
Learn the basic financial terms, plan out your investment goals, and consistently contribute money is a simple format to being financially wealthy in the future.
