Have you ever wondered how to invest? If you are a millennial and or just getting started on learning how to invest your money, you have come to the right place. How I went about writing this blog is because I friend of mine asked me about it while we were drinking at my house. She is very keen to know more about investing. I really appreciated her enthusiasm to learn at a very young age. My only regret was that I wish I started learning about investing much earlier. Although needless to say, I started contributing to my 401k at the age of 26, I did not really understand the real concepts of investing and have I known it earlier, I could have been so much richer at my age of 39 today.
During my younger years all I ever understood was that, I needed to contribute to my company’s retirement 401k account so I have money when I get old. Reality is yes, I did but i did not have the right understanding where and how I’m supposed to allocate money and therefore my lack of knowledge cost me thousands of dollars I could have earned. So, to this extent, I’m writing this simple guideline and steps to getting your first try in investing.
1. What is a stock? A stock is a share of a company’s ownership. An example would be Apple, Coca cola or Facebook. If you want to be a part owner of a certain company, you have to buy a share of stock in the stock market. That being said if you bought a share for example of Facebook, then now you are a part owner of Facebook.
2. What is a stock market? A stock market is where you buy your shares. There are a few ways to be able to buy shares such as buying from trading companies and or discount brokerages such as TD ameritrade, Merrill Edge, Charles Schwab, E*TRADE and many more. You can open an account with them ranging from IRA accounts to cash management accounts where you can buy or sell stocks on your own. Note that money you invest in certain types of accounts are not FDIC insured and therefore may loose value.
3. S&P 500, DOW and Nasdaq- S&P 500 is basically an index that measures the top 500 biggest/largest companies in the US. Because they are so large, they normally dictate the market performance. The DOW jones shows the 30 large companies in the US and measures how they performed during trading. Nasdaq tracks approximately 4000 companies which are all traded on the Nasdaq exchange. Bottom line, investors watch the 3 indices to get a feel of how the market is doing overall.
4. What are Mutual Funds? Mutual funds are a series or compilation of stocks that are sold on the market place. They are a great way to invest in multiple stocks all at the same time. These lessen your exposure to risk as these types of funds are managed by mutual fund managers who pick a series of stocks and manages them. An example of a mutual fund is Schwab S&P500 index SWPPX. This mutual fund holds stocks such as facebook, Apple, Microsoft etc. So, when you buy a mutual fund, you typically are not just buying one stock but a few of them all grouped together as one.
5. What are ETF’s? ETF’s are very similar to mutual funds where you are also not just buying a piece of stock but a group of stocks as well. The difference between an ETF is that they are traded like stocks and so you can buy them in the market place like any regular stocks. ETF’s require lower minimum investments and have lower expense ratios compared to mutual fund fees which are typically higher. (I prefer buying this type of investment by the way rather than mutual funds)
6. What is a Dividend? Dividend is basically the amount of money you get for investing your money on a certain stock, ETF, Reit, etc. Let’s say you invested $5000 on an ETF such as VBR/ Vanguard small cap value, you basically get a dividend or you get paid every 3 months for investing your money with them. Simple as that.
7. What is Capital Gains? It is the result of buying a stock at a lower price and re-selling them at a higher price. Hence profit and the saying buy low sell high.
8. What is a REIT? Reit’s are another type of investment in that it is focused on investing in real estate. These are typically companies who own apartment buildings, storage spaces, commercial and residential properties that they lease. They entice their investors by paying big payouts of dividends typically every month or every 3 months. A lot of investors like to invest on these kinds of products since they see money coming in constantly and because they pay high yield dividends.
9. What are Bonds? Bonds are IOU’s to a company or a government. Typically you lend out your money for a fixed period of time and in return the company or the government compensates you for the interest of borrowing money from you. Bonds are safer investments than stocks. With Bonds, the borrower typically makes a promise to pay you back the full amount of the loan at the end of the specific period or term.
10. What are Commodities? Example of commodities are gold, silver, oil or copper. They are physical resources you can own through some new set of ETFs’ now. You can buy and sell them through a process called futures contracts. If you are interested on these kinds of investments, I suggest to read on and fully understand how they work before investing.
Overall, you will be ahead financially if you understand the basic terms of investing and start getting your hands on it. That’s the only sure way for you to be able to truly appreciate investing and also learn how to invest and grow your money. My hopes are that this article will actually help millennials or those of you who are just getting started learning investing. Its not rocket science but there is a lot to learn and know before you can truly reap the rewards of making money with your investments. Like I said earlier, I wished I had known all this during my earlier years, but again its not too late to start. I hope this helps you gain some insights and encourage you to start investing.
What are your thoughts on investing? Drop me a message.