You may have heard the phrase “Let your money work for you” uttered in some form whenever anyone’s talking about life and business advice. This is what it means when they talk about investing. Investing is a means for you to grow your money and assets by placing it in a specific investment vehicle. In this article, we’ll be looking at investing in the stock market in order to grow your financials.
Also known as shares, stocks represents a company’s equity, or ownership in a company or corporation, allowing the stockholder/shareholder a proportionate claim on that company’s assets and earnings. In this way, the stock market is an electronic marketplace where investors come together to buy and sell their stocks in a public venue.
There’s two main types of stocks you’ll often hear about. These are the common and preferred stocks. Common shares typically provide voting rights to the shareholder, giving them a say in corporate meetings where they’re allowed to elect board members or even appoint auditors.
On the other hand, preferred stocks are given precedence when it comes to giving out dividends as well as assets in case the company goes into liquidation. However, preferred stocks typically do not come with any voting rights, reducing an investor’s sway in the company they have invested in.
Think of this process as something similar to crowdfunding. Growing a company will require enormous amounts of capital; something very difficult to do if founders will be relying solely on their own funds from sales and savings. While options such as bank loans, angel investors, and venture capitalists exist, a company can also choose to establish itself through an initial public offering, changing their status into a publicly-traded one open to the general public.
Once the company is listed on the stock exchange, its prices now start to fluctuate as investors try to assess and reassess the value of the company. Prices tend to be set in any number of ways but the most common method would be through an auction process where buyers and sellers place their bids.
Before committing your money to any particular stock or share, you first need to determine what kind of investor you will be. Ask yourself simple questions, such as:
It’s important to determine these things because there are many options for investing, with each of them being suited for different kinds of people.
After that, you will need the initial starting capital for your investments. This would cover the initial deposit required as well as any commissions for brokers and other fees you might need to pay. Doing your homework is essential prior to starting out, allowing you to be cost-efficient in your investments right at the start.
After that, take a look at the options currently available:
A mutual fund is made up of a pool of money collected from many investors that is then used by an institution to invest in many securities like stocks, bonds, and other assets. They are usually operated by managers who will then handle the allocation of funds in a way that will turn a profit for all investors. Under this scheme, all investors participate proportionately in any gains or losses the fund may accrue.
When investing in mutual funds, always remember that these charge annual fees, with some even charging more for commissions, affecting your returns. However, it is a good way to start investing as it grants access to a diversified portfolio and is usually a good introduction for beginners.
Take note that there are a few differences between mutual funds and the other type which are called “index funds”.
Index funds differ from mutual funds in that they invest in a specific list of securities (i.e investing in just S&P 500 companies or other similar funds) while active mutual funds often change based on the decisions of the investment manager managing the fund.
In return, index funds tend to have lower fees than active mutual funds while having a more predictable performance over time. Index fund performance is simply based on the price movements included in the index, making it a more passive form of investing strategy for those not looking to actively manage their funds.
Some employers provide retirement fund options for you, making this a good way to start investing. Try contributing a small portion of your salary to your 401K or other retirement options. Chances are, you may not even miss whatever amount you contribute and it will pay off in the long run once you finally retire.
Most of the time, work-based retirement investments like these deduct your contributions before taxes are calculated, allowing you to budget your finances a bit better. When you invest in something like a 401K, these are usually invested right back into a combination of funds which may even include your own company’s stock.
Robo-Advisors are digital platforms that allow you to invest with little to no human supervision. They typically use algorithms and data to automate your indexing strategy. They often charge flat fees for users that are low enough that it doesn’t become a barrier to entry.
Robo-Advisors offer 24/7 accessibility in the form of mobile apps so long as you have access to an internet connection. They are also a lot more efficient, allowing users to invest with just a few clicks of a button. You no longer need to wait to physically meet a financial advisor in order to make a trade.
Opening a robo-advisor simply asks you to fill out a questionnaire with your goals, financial situation and time horizon or how long you plan to keep your money in your investments. Of course, you do need to accept that with robo-investors, you need to be comfortable with technology and in letting it decide your overall investment strategy.
Investing in individual companies’ stocks can be a good way to try out stock market investing. You can start by buying single shares before moving on to building a diversified portfolio made from different company’s stocks. This will require significant investment however, and possibly a lot more active management on your part as you’ll be seeking and deciding which companies to invest in.
Compared to something like index funds and mutual funds, you can see meteoric returns when individual stocks do well, which makes your investment pay off well however, these are highly situational and are a bit more prone to risk. It is also a bit more time-consuming; something to keep in mind as a beginner investor.
When investing in the stock market, it’s important to just keep in mind two things:
One, you need to actively manage your funds from time to time. While fluctuations may not immediately affect your investments immediately, you do need to check and revisit them to see if they’re still aligning with your own goals.
Two, always think of the long-term result you’re looking to get the most out of it. Stock investing may seem like it's filled with all sorts of investing strategies that can be daunting to get into but you’ll most likely do fine by attaining mastery of the basics first. Remember that this is a long-term investment strategy so being impatient and trying to grow too fast too early can be really stressful and might result in poor decisions later on.
Remember that stock market investing doesn’t have to be that intimidating for rookie investors like you. There are so many options now, ranging from investment apps, robo-investing, and even investing with your own company. It all just boils down to how much you are willing to risk, how much time you're willing to spend learning it, and what your long-term goals for the future are.
Investing in the stock market allows your money to grow over time while not being hindered by inflation or other factors. Don’t be afraid to give it a try and start investing today. Good luck!
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