The Beginner's Guide to Investing

• When you think of investing, do you picture people in suits yelling “Buy! Sell!” and throwing scraps of paper in the air? That’s not really how it’s done anymore, but those dramatic and complicated scenes stick in our minds. For lots of us, investing exists in our subconscious as a complex science that is best left to professionals and people with tons of money. The reality is much less exciting—and way more accessible.
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  Investing is not just reserved for the wealthy anymore, and that’s good news! New technology has democratized investing and made it available to the general public by offering the option to buy, sell, and trade shares without the hassle of meeting an advisor, and often entirely free from fees. Investing is a reliable path to wealth that is often overlooked for fear of the unknown.
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  As a result, Americans aged 23-38 have a not-so-great situation: Almost half of Millennials are not investing. Higher than ever student loan obligations, low wages, increased cost of living, and two enormous economic downturns have had a devastating effect. Whatever the reason, young people are not buying stock directly or through mutual funds, exchange-traded funds, or retirement plans. Saving definitely has its place in the financial playbook, but it will never make you wealthy. Investing creates a powerful path to prosperity—and the earlier you start the better off you may be.
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  This article will cover what investing is, how it started, how you can become an investor, the risks, the potential rewards, and how to determine what type of investor you are.
  

• Investing is contributing resources with the expectation of those resources being returned in full, plus a little extra. That little extra is called your return, and it’s the income generated by your initial investment. The most common way to invest is through the stock market.
  

• The stock market is the place, yes it’s an actual place, that investors buy, sell, and trade shares of stocks. The stock market was invented more than 400 years ago when, in the early 1600s, countries like Britain and Holland needed a way to make money (aside from taxing their citizens). Other countries were larger and more heavily taxed, and were able to use those funds pulled from the public to grow their industrial infrastructure. Better infrastructure leads to more jobs, which leads to more taxes, which leads to a more powerful country.
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• Without that kind of power, these tiny countries needed to think on their feet—and avoid the inevitable uprising associated with taking more of the citizen’s money against their will (remember the Sheriff of Nottingham in Robin Hood?). Instead, the leaders created an arrangement with some large companies that were doing well. The deal was that the government would loan the companies some money in order to produce more, and when they reaped the rewards of that increased production they would share a bit of that revenue.
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• Once the experiment panned out, regular people wanted to be involved. The idea caught on and Dutch companies began issuing ‘profit shares’ on pieces of paper called ‘stocks.’ People met on a certain day to swap their paper stocks; buying, selling, or trading them with other investors. These meetings were the original stock exchanges.
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• The major stock markets that we know today emerged in the 19th and 20th centuries. All of the world’s major economic powers have highly-developed stock markets that are active today.
  

• Since its inception, the stock market has been a way for investors to grow their wealth—but it’s not a guarantee. There are seasons in every business, and even when companies aren’t in danger of failing, their stock price can swing up or down. Stock prices can be influenced by factors inside the company, like a faulty product, or by events the company has no control over. You only have to look as far back as recent history to see how international events impact the market overall and in turn individual stock prices.
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• On the flip side, when you do reap a reward, that’s not totally free from consequence either. Taxes must be paid on what was earned, and those taxes are called capital gains. The amount of taxes is highly personal and dependant on a number of factors, so everyone’s rate will vary.
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• That being said, there are three things to keep in mind:
• • How long have you held the investment? Generally speaking, you will pay a higher tax on investments you hold for less than a year.

• • Are the capital gains being offset by capital losses? Capital losses are the opposite of capital gains.

• • What is the tax treatment for the underlying asset on capital gains? The Internal Revenue Service taxes some investments differently.

• Before you invest, it’s best to have your financial house in order. Life’s little emergencies can and will pop up. If you don’t already have a mini emergency fund in place, now is the time to check that off your list. A mini-emergency fund of $500 to $1,500 is the first step in establishing a fully stocked emergency fund. With this safety net in place, a large bill won’t set your whole budget off-kilter. It’s not just peace of mind, it’s good business.
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• Additionally, it’s recommended that we all work on building an emergency fund that covers a few months of our most basic expenses. The experts all suggest a different number of months to cover, but they all agree on one thing: You need one. Because this is such a big goal, pace yourself and take a year or two to grow it.
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• The best place to stash both of these accounts is in a high-yield account that allows your money to earn interest that will in turn compound. Compound interest is when the interest you’ve earned on your money starts earning interest itself and then that new interest also starts earning interest and it goes on and on. Welcome to the world of your money making money for you.
  

That’s the big question. We, as a country, are people in debt. Consumer debt sits at an average of about $6,000 per person, and student debt is about $30,000. That’s a problem because debt prevents many from investing. That’s a problem because people who start investing at a young age have more time to generate returns. In fact, 21% of millennials have invested less than $500 in total over their lifetime. Overall, 54% of 25- to 34-year-olds have invested less than $5,000, and only a small percentage—14%—have invested more than $50,000. Of course, it’s much more complicated than that. Certainly, age, income, ethnicity, family type, and education level are all factors.

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Does it make sense to invest while you’re in debt? The short answer: Maybe. As with most things of a financial nature, it’s highly individual. Overall, there is a rule of thumb to follow when deciding to pay down your debt or invest and it’s super simple: if you stand to earn more in returns than you’ll pay in interest on the debt, then yes.

Financial education comes with a whole new vocabulary to learn. Here are a few basic terms that you’ll see pop up over and over again.

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• • Allocation - In finance, allocation refers to the amount or portion of a resource assigned to a particular asset.

• • Asset - An asset is a resource with a financial value that an individual or corporation owns with the expectation of future benefit.

• • Asset class - Assets are classified into groupings of investments that share similar characteristics, think cash, stocks, bonds, and gold.

• • Bull vs bear markets - A bull market is a financial market of a group of securities in which prices are rising or are expected to rise. Conversely, a bear market, which is characterized by falling prices.

• • Diversification - Diversification is the process of spreading, and hopefully reducing, risk by making investments into a variety of classes.

• • Exposure - Exposure is the number of funds invested in a particular asset class; to ‘gain exposure’ means to purchase from that asset class.

• • Portfolio - A portfolio is a grouping of financial assets, your personal collection of investments.

• • Return - A return is the money made or lost on an investment over time.

There are two main ideological investment styles. They each have their pros and cons and will appeal to different investors, here they are:

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‍ Passive investing

Passive investing is an investment style that involves buying and holding assets for a long period of time. A favorite of long-term investors, this style means buying and holding in the hopes of growth. The average returns of investing in the stock market are much higher than with other types of investing, comparatively. A long-term mindset is essential when investing for growth and adopting a passive style.

This style involves researching industries and companies that have a record of doing well, even during tough economic times. Alternately, you could find companies on the cusp of progress and innovation who have yet to see their full potential. Passive investing is best for people who like minimal involvement and seek to earn long term wealth.

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‍ Active Investing

‍Active investing is an investment style that involves a high-touch take on the purchase and sale of your assets. Day trading is considered to be an active style of investment. It’s interesting to note that many day traders do not do well. A famous study by the University of California notes that “in the typical six month period, more than eight out of ten day-traders lose money.” So what’s the draw? Quick money.

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This style involves lots of research, lots of hands-on work, and lots of potential profit. Instead of riding the gentle rise of the overall market, active investing seeks out the potential to exploit profitable conditions.

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Generally speaking, active investing is best for people who believe that managing their own money means they will beat the average return of the stock market

Sometimes they’re called assets, products, or vehicles, but they all amount to all of the different ways for you to invest your money. Because investing is an inherently uncertain endeavor, understanding this and your tolerance for it is key in creating a workable investment plan. If you take on too much risk, you might panic and sell at the wrong time. Alternately, you could play it too cool and miss out on big gains in the market. Here are some asset classes listed from lowest to highest perceived risk:

Cash

Cash is the paper currency tucked in your pocket as well as the virtual funds in your checking and savings accounts. Cash is considered to be very low risk. The money you park in a bank account is protected by the FDIC for up to $250,000 and if anything happens, you will not be at a loss for those funds.

Because cash investments are so low risk they are in turn very low reward. The average savings account interest rate hovers at under 1%, which isn’t even enough to overcome inflation. However, many people are happy to give up the growth in exchange for access and security.

Cash investments are best for people who want super low risk and constant access. Whether it’s in your bank or under your mattress, you can generally rest assured that your cash is safe, but not giving much of a return, if any.

Bonds

Bonds, sometimes called fixed income, are a way for the average investor to buy into debt. When you buy a bond you are loaning a corporation or the government money in order for them to pay off their debts or complete a project. In exchange, they will repay you over time with very meager returns. The returns are so slim because the bonds most certainly will be paid back, which makes them a very low-risk investment option.

There are three types of bonds: Treasuries, corporate, and municipal. Treasuries are backed by the full faith and credit of our U.S. government and there is little risk of default. Corporate bonds often carry a higher risk but generally offer higher potential yields. Municipal bonds sometimes offer higher rates but come with a bit higher risk because local governments can go bankrupt, though it doesn’t happen often.

Bonds can be purchased through a traditional brokerage or even directly through the U.S. government. Bonds are great for people who are near to their retirement age and want to even out their riskier investments with something more sound and predictable.

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Mutual funds

A mutual fund is a bundle of stocks, bonds, or other assets—so the risk associated is based specifically on what is in each individual fund and how well it’s balanced. There are specialty mutual funds that contain riskier investments, like emerging markets, to try and capture a higher return. As expected, these kinds of funds also tend to have a greater risk. Mutual funds are actively managed, meaning a fund manager makes decisions about how to allocate assets in the fund.

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Mutual funds can be purchased directly from a mutual fund company, a bank, an online platform, or a brokerage firm. Investors who will access their money in more than five years time are the best candidates for mutual funds.

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‍ Index funds

‍Even if you don’t know much about investing, the name S&P 500 probably rings a bell—it’s an index fund. An index fund measures the performance of a collection of securities, which is meant to represent a sector of a stock market. Some index funds track only companies of a certain size, while others stick to a certain sector. Like a mutual fund, its contents predict its risk level.

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Index funds follow a passive investing path and generally are best for long term investors. You can invest in an index fund directly or through any number of platforms or a brokerage firm. Index funds are best for investors looking to round out their portfolios with a generally low fee fund that tracks overall market performance.

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Electronically traded funds, ETFs

In the simplest terms, an ETF is a collection of securities that you can buy or sell through a brokerage firm on a stock exchange. A bunch of stocks are bundled together based on some underlying connection—say industry, performance, theme, or geography for example—and then assigned a ticker number and traded like a stock.

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These function a lot like a mutual or index fund and, again, are only as risky as their selections. Because the minimum ETF buy-in tends to be lower than mutual funds, these can be a great option for new investors.

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‍ Stocks

‍Over time, investments in stocks have given the highest average rate of return. Because there are no guarantees of high returns when you buy stocks, that makes them a strong risk. Historically and on average, the stock market has provided a 10% return to its investors who are well diversified.

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Investing in stocks means to buy a small piece of a company in exchange for a portion of its growth when it (hopefully) does well. Stocks can be purchased from a bank, an online platform, or a brokerage firm. Investing in stocks is a solid option for investors who think they can turn a quick buck day trading and those with a long way to go before they plan to access their cash.

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‍ Alternative investment options

‍If an investment doesn’t fit into the cash/stocks/bonds category, it is considered to be an alternative investment. That can mean lots of things:

• Issuing personal loans and collecting interest with peer to peer lending is a newish investment concept borne of a lock of personal loans offered by banks.
• Real estate, either in the traditional form or through something called an REIT that trades value like a stock, has always been an option but is now just becoming possible for the average investor.
• Art and collectibles have long been an interest for the mega-wealthy, but now new-age platforms like Rally Road and Otis allow investors to chip in on a piece together and share the profits when sold.

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While these outside the box investments might seem like the riskier option, they’ve historically pulled the same average return as the stock market. Alternative investments can be a great element of an already diversified portfolio for an adventurous investor.

Once you’ve decided on your investing style and how you’d like to invest, the next step is to actually go do it. You probably know that you don’t stuff an envelope full of cash and mail it off to the NYSE, but you might not know your options.

If you are currently banking with a major financial institution, they may have an investment arm of their services that might work for you. Your funds are connected through your main banking accounts, which should make automatic investments seamless.

For investors who want a little extra guidance, an IRL financial advisor can work well. When you choose an advisor, be sure to go with a fee-only fiduciary advisor. By law, a fiduciary has to act with your best financial interests in mind, which is a relief if you’re new to the investing universe.

For investors who want zero interaction, there are automated investors who take over the whole process for you. Roboadvisors create portfolios and automatically invest your funds in alignment with your interests and goals.

A happy medium between an in-person advisor and letting the robots take over is an online investing platform. Typically, these platforms feature excellent user experience and are backed by professional fund managers, making them a breeze to use. One word of caution: the world of fintech (financial technology) platforms features a lot of new kids on the block. Be sure to research the platforms and see who is really backing their tech and handling their banking, ensuring that your money is safe.

Investments, like everything in personal finance are, well...personal. Options abound and different methods work best for different investors. The investing landscape has shifted alongside technology and has moved away from people literally trading slips of paper to the ability to trade stocks from your pocket. The first step to successful investing is figuring out your goals and risk tolerance, learning about investment products, and changing your strategies as your lifestyle and your goals change. You don’t have to stick with the typical stocks and bonds, there’s an option for whatever feels right for you.