Investing 101: Basic and useful concepts
Investing? It might sound like a foreign concept you, but we are here to help you decide why you should start investing and the best way for you to start.
Money may not grow on trees, but it can in fact grow. How do you do that? Through investing.
That may sound intense to you. You might be thinking “Investing? I don’t have a degree in finance!” But think again. While learning how to invest your money does take a bit of know-how, anyone who takes the time can do it, and with technology these days you can start investing as little as $5 all through your phone - but we’ll get to that later. For now, we’ll start with what investing your money means, why it’s important, and how it works.
Investing vs. Saving
Let’s start with the difference between saving your money and investing it. Because everyone’s probably told you your whole life the importance of saving money, right? But here’s the catch: saving money by setting it aside in a piggy bank or a checking account does just that. It sits there, untouched, waiting for you to access it whenever you’re ready. Investing, on the other hand, is just like putting your money away to save it, but instead of it just sitting there, it grows overtime. In fact, not only does leaving your money in your piggy bank not grow your money, but it actually causes it to lose value because of inflation.
Inflation is the rate at which the average prices for goods and services increases every year, slowly decreasing the value of the dollar. Have you ever heard your parents or grandparents mention how they could buy a Coke for only 10 cents? That’s inflation for ya. Let’s take a look on a larger scale:
Say that you want to save $1,000 for a purchase 10 years from now. If you left that money untouched, it may only be worth about $800 if inflation is at a rate of only 2%. But, if you invested that amount, and the average investment grows at 7% per year, you could almost double the amount of money you intended to save.
When you invest, you’re loaning your money to places like governmental organizations or companies that use your money to grow profit that is then returned to you. Of course, this doesn’t come without risk, which is why investing can sound intimidating to the average joe. That’s why we’re here: to help you to understand investing and its associated risks, and to help you realize that you can totally do this.
Investing in terms of risk.
You can basically break down investments into three categories: low risk, medium risk, and high risk. The greater the risk, the greater the potential reward, so it’s important to consider your goals and what you’re looking to save towards. Is it money to save for a car in the short term? Or saving up for retirement farther out?
Low-risk investments are pretty much exactly what you’d expect - putting your money into a vehicle that will allow your money to grow just a little, but you can sleep at night knowing that the odds of losing money by making this investment are way in your favor. The best part is that these can be as simple as opening a savings account for yourself. Yes, that simple difference between opening a savings vs. a checking account can grow your money overtime, yet 34% of Americans have nothing in their savings account. This is a major issue as savings accounts will earn you about 1% interest per year, helping to ensure that your money does not lose its value and making this one of the first and easiest steps into becoming financially stable.
Other low-risk investments include:
- Savings bondsthat maintain your money’s value but are untouchable during a period of time.
- Certificate of Deposit, or a CD from the bank, in which the bank will pay you interest so long as you don’t withdraw the money until the term ends.
- Money Market Fundsthat are short-term and liquid, meaning you can pretty much take out your money whenever you want.
Medium-risk investments allow you to earn more money overtime, but can be a longer-term investment, and along with the increase in return, there is an increase in risk that you lose money.
Generally, with medium-risk investments, you’ll lend your money to a governmental organization or to a company that in turn uses your money to grow, gaining you higher interest on your return. These can last anywhere from 1 to 30 years, depending on the agreement you make, and risks come in the form of credit or time value.
These investments would be like investing in stock, or the equity of a company so that you own a share of what they do. You can buy and sell stock to hopefully play the game right and come out on top. Yes, these lend you the opportunity to earn much more money overtime, offering the highest return on your investment, but with the high potential for reward comes higher risk meaning these investments can be much more volatile. For example, if you had invested in Amazon in the early days, you probably wouldn’t even need to be reading this article. The success of the company would have given you such high returns overtime, but there’s also essentially no way that you would have known it would be one of the largest companies taking over the world. And on the flip side, you could have invested in a company that really seems to be on top of whatever is going to be the next big thing, but could end up being a flop, losing you money in the long run.
Risk is relative, but a little bit of risk is well worth the payoff. Start small and increase your earning potential as you learn more about how investing works, and don’t be afraid to seek out advisors as you increase the risk in your investments.
Things to Keep in Mind
The market is always changing, so be prepared for some bumps in the road when you invest. While you’d love to assume that putting your money somewhere means it’ll only get bigger and bigger, there will be periods of time that your stock will go down. And that’s OK. Investing is a largely long-term mentality, not a game to play, so it’s important to keep a cool head. Besides - it can actually be a smarter move to invest when the market is down, as it could just mean a really sweet discount on what is still an incredibly successful company.