A Beginner’s Guide to Investing in the Stock Market

This guide “Investing for beginners” leads you to step by step to invest without feeling overwhelmed.

Do you want to make more money with your money? Well, it can’t do its work hiding in a bank account.

Whether you are saving for your child’s college or preparing for retirement, you will achieve your goal faster by investing. You will also learn how to invest money in your 20s.

Here’s everything you need to know to get started today.

What is an investment?

When you invest, you buy something in the hope of benefiting in the future.

In the 1990s, some thought they made smart “investments” in Beanie Babies and McDonald’s toys. However, traditional investments include items such as corporate property, real estate assets or loans to a person or company in exchange for interest.

Invest. Return on investment. Financial growth. Technology and business concept

Why should I invest?

It is not enough to save money to create wealth. A bank will keep your money safe. But inflation makes every hidden dollar worth a little less every year. A dollar you put into the bank today is worth a little less tomorrow.

When you invest, your dollars work to make more dollars. And these new dollars will bring you even more. Which then work to earn you even more. The snowballing force of growth is known as compound growth.

In the long term, your assets can grow beyond the rate of inflation. Your savings so far are self-referential rather than losing value over the years. This facilitates saving for long-term goals like retirement.

When should I start investing?

Yesterday. If you have not started yet, this is an excellent second choice.

In general, you want to start investing as soon as you have a solid financial footing. These include the lack of high-interest rates, the establishment of an emergency fund and the achievement of your investment objectives. In this way you can have your money invested long term – the key to maximum growth – and have confidence in your investment decisions at the natural highs and lows of the market.

Advantages of Starting Young

When it comes to investing, time is the most powerful tool. The longer your money is invested, the more work you need to make more money and profit from growth. In addition, a single downturn in the market is less likely to have a negative impact on your wealth, as you have time to leave the money invested and regain its value.

Let’s look at an example:

Since 1928, the average return on the S & P 500 (a rate of 500 of the largest US corporations that has been widely used to approximate the stock market) has been around 10%.

Let’s say you’re 25 years old and are investing $ 5,000 in the S & P 500. Each year you will see a 10% increase in value and keep your money growing. When you turn 65, you open your account and find that you have over $ 226,000. An excellent retirement gift for you!

However, if you wait until the age of 35 to invest, your value at the age of 65 is only $ 87,000. Still impressive. But less than half of what you would have had if you started 10 years ago.

First pay off high-yield debt
If you still have debts with high-interest rates, such as credit cards or personal loans, you should wait until you invest. Your money works harder for you by eliminating these cumbersome interest rates than is the case on the market. If you pay 1 USD of debt, you save 12%, 14% or more of future interest. It is expected that more than traditional investments will return.

What is a stock?

A stock is a small part of the ownership of a business. A stock, also called “share”, is a minimum stake in a company. Public companies allow anyone to buy or sell shares on their company’s stock exchange.

If you own a stock, you own a part of the company. Go there! If you own a stake in Walmart, you will not be able to transfer the slow box to your store. You have certain rights. For example, you can vote on the members of the Board of Directors.

What is a Bond?

A commitment is a debt of a business. A commitment is a debt of a corporation, a community or a country.

By buying a bond, you are lending money to one of these companies. For corporates, bonds are typically segmented in increments of $ 1,000, with interest being accrued every six months, with the total being redeemable at maturity, ie the date of the bond. Government bonds are generally referred to as “treasures”.

What is a portfolio?

A portfolio is a set of all your investments held by a particular broker or investment provider. You can own stocks, bonds or individual ETFs. Everything in your account would be your wallet.

However, regardless of the type of account, your portfolio can cover all of your investments as it gives you a better idea of ​​your overall exposure.

What does diversification mean?

Just as you do not invest all your money in your friend’s idea for a spicy pumpkin toothpaste company, you do not want to just invest in a stock or bond. Diversification means different investments. Therefore, your success or failure does not depend on one thing.

To be well diversified, you want to make sure that your investments are really different. Owning three different clothing companies always means that you are exposed to the same risks. For example, an import tax on cotton products could affect the value of the three companies at the same time.

What is Asset Allocation?

For most investors there are three main classes: stocks, bonds and cash. When allocating assets, you assign your investments to these three categories.

Stocks offer better long-term returns, but much greater value fluctuations. These fluctuations, which are sometimes 20% up or down in a given year, can be very painful. Bonds are safer, but offer lower returns for that security.

You determine your asset allocation taking into account the time it takes to dispose of your money, your risk appetite and your goals.

What are ETFs?

With ETFs or Exchange Traded Funds, you can buy small parts of many assets in a single stock.

An ETF is a fund that holds many stocks, bonds or commodities. The fund is then divided into units that are sold to public investors.

ETFs are an attractive investment option as they offer low fees, immediate diversification and liquidity of a stock (they are easy to buy and sell quickly). By purchasing a stock or bond ETF, you have access to many investments, all of which are held within that ETF.

Stock Funds

A stock ETF often tracks an index such as the S & P 500. When you buy a stock ETF, you buy a complete portfolio of small portions of all stocks in the index that are weighted by size in that index. Index.

For example, if you bought an S & P 500 ETF, you only buy one thing. However, this ETF holds the shares of the S & P 500 companies, which means that you actually own small shares of the 500 companies. Your investment would increase or decrease with the S & P and you would earn dividends based on your share of the dividends paid by the 500 companies.

bond funds

A bond ETF has a basket of bonds that often follows an index, as does stock ETFs.

These funds could include a mix of government bonds, rated corporate bonds and foreign bonds. The most important difference between holding a single bond and a bond ETF is the payment of interest. Bonds earn interest only every six months. Bond ETFs, however, pay each month because all the bonds the fund holds can earn interest at different times of the year.

Types of investment accounts

If you want to buy stocks, bonds or ETFs, you may be wondering where these types of investments are held.

There are several types of accounts in which you can invest. However, you can not live in your default account. Here are your options.

retirement accounts

Saving for retirement is the main goal of most people. For an average person who retires at the age of 62, either because of their choice or because of layoffs or health problems, most Americans are 20 years or older for whom they need assets to feed themselves.

To prepare you for this colossal goal, the government offers tax incentives. However, if you invest in these accounts, your access to your money is limited to 59 ½. In some cases, there are fines to withdraw your money earlier.

Here are the types of accounts that offer tax savings.

Employer-sponsored accounts

Employer-sponsored retirement accounts such as 401 (K), 403 (B), 457 etc. allow employees to save directly from their retirement paycheck. Some employers offer matching contributions to double your retirement savings.

Generally, you put “pre-tax” money into these accounts, which means that you do not pay income tax on these dollars. The money invested increases without taxes until you withdraw it to cover your living expenses in retirement. When you withdraw money, you pay taxes on withdrawals. However, most people are in a lower tax bracket than retired;

Starting in 2019, you can contribute up to $ 19,000 per year to one of these accounts, with employer contributions disregarded. If you are 50 years or older, you can contribute up to $ 24,500 per year.

Traditionally against Roth IRA

If you do not have access to an employer-sponsored retirement account, or if your contribution has already been maximized, you can also open an individual retirement savings account (IRA) to invest.

There are two types of IRAs: traditional and Roth.

A traditional IRA works just like the employers’ tax plans. Any money paid is treated as “before taxes” and reduces your taxable income for that year.

A Roth IRA, on the other hand, is financed with tax credits. This means that you have already paid your income tax. If you retire, you will not pay income tax or capital gains tax. The money is yours. The Roth IRAs offer excellent tax benefits, but are available only for certain income levels. If you earn more than $ 135,000 a year as a single-filer or over $ 199,000 as a married filer, you are not eligible for a Roth-IRA.

From 2019, you can pay an IRA up to $ 6,000 per year. If you’re 50 years or older, you can contribute up to $ 6,500 a year.

529 savings plans for College

These accounts, offered by each state, provide tax breaks for parents who save for college. As Roth IRA, contributions are tax-deductible, but all withdrawals are tax-exempt as long as the funds are used to finance university spending.

Your state may offer tax breaks or contribution matching to invest in your local 529 plan, but you can use the 529 of each state. Since every state has different fees and investment options, you should find the best 529 for your money.

Brokerage accounts

Brokerage accounts offer no tax advantage to invest but act as a standard account to keep your investments. The annual contributions to these accounts are unlimited and you can always access your money.

Cash or cash equivalents

Since the investment should only be long-term, you may need to save money to achieve shorter-term goals. In this case, a traditional bank account may not be enough. Current accounts and savings accounts offer incredibly low or no interest rates, meaning that you are completely exposed to inflation.

Fortunately, there are money accounts that pay higher interest rates:

A CD or a deposition certificate is a savings account that restricts access to your money for a specified period of time (6 months, 12 months, 24 months, etc.). If you want to withdraw your money before the end of the period, a small penalty will be imposed. However, these accounts usually offer a higher interest rate if you do not have access.

High yield savings accounts are the middle ground between CDs and traditional savings accounts. You pay higher interest than a traditional savings account and allow a few transactions per month, so you can access your cash when needed. Many high yielding online savings accounts have no minimum deposit or fees.

Money market accounts are very similar to high yield savings accounts, but with slightly higher interest rates and higher deposit requirements. The CIT Bank’s money market account, for example, offers an interest rate of 1.85%, but requires a minimum deposit of $ 100.

On none of these accounts is your deposited money in jeopardy. FDIC insurance guarantees your money, even if the bank maintaining your account goes bankrupt.

Where to concentrate first

When you start investing, it can be difficult to choose between different types of investment accounts. Start by thinking about focusing on the value you see most.
First, make enough contributions to your employer-sponsored retirement plans to get the full value of a game offered by the company. It’s free money and an immediate return on your investment. If you are not sure whether your employer is proposing a contribution, contact the Human Resources Department for the most up-to-date strategies.
Second, you should minimize the contribution limits of your tax-deductible accounts – if you are saving mainly for your child’s retirement or college. The tax benefits of these accounts save you money that you do not want to unnecessarily transfer to Uncle Sam.
Finally, you invest excess capital in brokerage accounts. This helps you to save for long term goals, eg. B. the purchase of a holiday apartment in ten years.
Note: All of the above conditions assume that you have repaid all of your high-yield credit card debt and have a solid budget. If you have not done these things yet, adjust them before investing.

7 golden rules to invest money

You may be a beginner, but that does not mean you have to make costly mistakes. Follow these seven golden rules and you are on the road to success.

1. Play the long game

Never invest at short notice. The market moves in natural cycles that cannot be timed. An investment of less than three to five years will not give you enough time to replenish the value of your assets if you experience a slowdown at the wrong time.

2. Do not put all eggs in a basket

Do not put too much money into a single action or connection that could destroy your fortune. Diversify with low-priced index ETFs and avoid stock selection.

3. Make a monthly habit of investing

Although headlines are constantly demanding a high or low market, no one can determine exactly where we are in the cycle at any one time. The best way to make sure you are buying at the right time is the monthly habit of investing. Invest every month regardless of security or market performance.

4. Only invest in what you can afford to lose

Investments are risky. Although the long-term trend has increased in the past, there have also been years of deep decline. If you need short term money or want to lose 20% of your account balance, you have a heartache. Do not create these funds.

5. Do not check your wallet every day

Investment is the only place where a head-to-sand strategy could be the smartest method. Make automatic deposits into your investment accounts each month and review your portfolio every three to six months. This reduces the risk of panic sales when the market collapses or more money accumulates when everything looks like rainbows and butterflies.

6. Keep your fees low

Investment funds and ETFs have expense ratios. Many brokers charge a negotiation fee. And investment providers, financial advisers to Roboadvisors, charge a management fee. All of these expenses reduce your wealth over time.

Keeping up with index funds and ETFs keeps a small fee while ensuring that market performance keeps more money in your pocket.

7. Listen to the investment tips from Warren Buffet

Warren Buffett is perhaps the most famous investor in history. In just one generation, he has created fortunes of billions of dollars. Learn from his tips how to invest in your own future!

“Somebody is sitting in the shadows today because someone planted a tree a long time ago.”

“I never invest in something I do not understand.”

“If you can not find a way to make money while you sleep, you will work until you die.”

“The stock market is a way to transfer money from the impatient patient to the patient.”

“There’s no need to do extraordinary things to achieve extraordinary results.”

How do I start investing today?

An easy way to invest today with your phone or laptop is to open an account with Acorns.

Acorns was selected as one of the best investment applications by DollarSprout in 2018
Acorns is an ideal micro investment app for beginners. The baseline, Acorns Core, starts at just $ 1 / month with a $ 5 free sign-up bonus for new users.

When you make a purchase with a linked debit or credit card, Acorns rounds out the next dollar and puts your currency in reserve. You can increase your rounds by 2x, 5x or 10x.

In addition to round-ups, you can configure recurring daily, weekly, or monthly investments in your Acorns portfolio. Your Found Money service also finds cashback opportunities with more than 200 partners and automatically invests your savings when you make a purchase.

Creating an account takes only a few minutes. Once you complete your profile, Acorns offers one of the five portfolio options based on the information you provide. However, you have the option to override your proposal if you prefer a more or less risky portfolio.

The platform automatically restores your portfolio and re-invests all dividend payments to further increase your investment.

Acorns is a smart option for self-employed investors and newcomers. As your account grows, the $ 1 to $ 3 monthly fee will remain unchanged, which will make the service cheaper over time.