What Is Investing? How Can You Start Investing?

Investing involves acquiring assets that appreciate in value over time and yield returns through income payments or capital appreciation. On a broader scale, investing can encompass dedicating resources, whether time or money, to enhance one’s personal life or the well-being of others. In the realm of finance, investing refers specifically to acquiring securities, real estate, and valuable assets with the aim of attaining capital gains or generating income.

How Does Investing Work?

At its core, investing functions by purchasing an asset at a relatively lower cost and subsequently selling it at a higher price. This outcome, characterized as a capital gain, represents the profit generated from your investment. Achieving earnings through the profitable sale of assets, thus realizing your capital gains, stands as a method for generating profits through investing.

When the value of an investment increases from the time of its purchase to the point of sale, this is referred to as appreciation.

There exist four primary asset categories into which individuals can invest, aspiring to witness value growth: equities (stocks), fixed-income securities (bonds), commodities, and real estate. Beyond these foundational investment vehicles, there are investment vehicles like mutual funds and exchange-traded funds (ETFs) that acquire assorted combinations of these assets. By investing in these funds, you are essentially investing in numerous individual assets, potentially numbering in the hundreds or thousands.

Stocks

Companies issue stocks to secure funds for their operational needs. Acquiring stock shares provides you with a fractional ownership stake in a company, enabling you to partake in its profits (as well as its losses). Certain stocks additionally distribute dividends, modest regular payouts derived from a company’s earnings.

Given the absence of assured returns and the potential for individual companies to face insolvency, stocks carry more significant risk compared to certain alternative investment options.

Bonds

Bonds enable investors to adopt a role akin to that of a lender. In situations where companies and nations require capital infusion, they borrow funds from investors through the issuance of debt instruments known as bonds.

Investing in bonds entails providing a loan to the issuer for a specified duration. In exchange for your loan, the issuer commits to providing you with a predetermined rate of return, along with the principal amount you initially lent.

Due to their secured and unchanging return rates, bonds are often labeled as fixed-income investments and generally hold a lower level of risk when compared to stocks. Nonetheless, not all bonds can be classified as inherently secure investments. Certain bonds are released by companies with unfavorable credit standings, indicating a heightened possibility of failing to meet their repayment obligations.

Commodities

Commodities encompass agricultural goods, energy resources, and metals, which can include valuable metals. These resources commonly constitute the essential materials utilized in various industries, and their pricing hinges on market demand. For instance, in the event of a flood disrupting the supply of wheat, the scarcity could prompt an increase in its price.

Purchasing “physical” commodities implies holding tangible quantities of items like oil, wheat, and gold. However, this approach isn’t the typical means through which most individuals invest in commodities. Instead, investors engage in commodities trading via futures and options contracts. Additionally, there are alternative avenues to invest in commodities, such as utilizing ETFs or procuring shares from companies involved in commodity production.

Investing in commodities can carry a relatively elevated level of risk. Futures and options trading often entails leveraging borrowed funds, which heightens the potential for losses. Consequently, investing in commodities typically appeals more to seasoned investors.

Real Estate

Investing in real estate involves purchasing a residence, a constructed structure, or a parcel of land. The risk associated with real estate investments spans a range and is influenced by a diverse array of factors, including economic trends, crime prevalence, educational institution rankings, and the stability of local governance.

For those interested in real estate investment without the responsibility of direct ownership or management, an option is to acquire shares in a real estate investment trust (REIT). REITs are corporate entities that employ real estate assets to generate profits for their shareholders. Historically, they often offer more substantial dividends compared to numerous other assets, such as stocks.

Mutual Funds and ETFs

Mutual funds and ETFs engage in investing in stocks, bonds, and commodities, adhering to specific strategies. When you purchase shares of funds like ETFs and mutual funds, you’re effectively investing in a multitude of assets simultaneously. This simplified diversification contributes to mutual funds and ETFs generally carrying lower risk than individual investments.

Despite being categorized as fund types, mutual funds and ETFs operate with some distinctions. Mutual funds engage in the buying and selling of a wide array of assets and often feature active management, where investment professionals decide on investment choices. The objective of mutual funds frequently revolves around outperforming a benchmark index. This hands-on management approach usually translates into higher investment costs compared to ETFs.

ETFs similarly comprise numerous individual securities. However, their focus generally lies in mirroring the performance of a specific benchmark index rather than attempting to surpass it. This passive investment approach implies that your investment returns will likely align with the average benchmark performance.

As ETFs are not actively managed, they usually come with lower investment costs than mutual funds. Historically, only a limited number of actively managed mutual funds have exhibited long-term outperformance against benchmark indexes and passive funds.

How To Think About Risk and Investing

Diverse investments present varying degrees of risk. Embracing higher risk potentially leads to swifter growth in investment returns; however, it also entails a heightened likelihood of encountering financial losses. On the contrary, opting for lower risk might mean a more gradual accumulation of profits, yet your investment is secured to a greater extent.

Assessing the level of risk you’re willing to assume in investments is referred to as determining your risk tolerance. If you feel at ease with experiencing greater fluctuations in the short-term value of your investments in exchange for the potential of higher long-term gains, your risk tolerance is likely higher. Conversely, if you prefer a steadier, more measured rate of return with fewer volatility swings, your risk tolerance might be lower.

In broad terms, financial advisors often recommend embracing more risk when your investment aims are distant, as in the case of young individuals investing for retirement. With several years or decades before you require access to your funds, you generally possess a better capacity to recover from declines in your investment value.

For instance, the S&P 500 has encountered various short-term declines, including periods of recession and depression, yet it has maintained an average annual return of approximately 10% over the last century. However, if you had required your funds during one of those downturns, you could have faced losses. This underscores the significance of contemplating your investment timeline and overall financial situation when making investment decisions.

Risk and Diversification

Irrespective of your risk tolerance, one of the most effective strategies to mitigate risk is to possess a diverse array of investments. You’ve likely come across the adage “don’t put all your eggs in one basket.” In the realm of investing, this principle is referred to as diversification, and achieving the appropriate level of diversification is pivotal in crafting a successful and comprehensive investment portfolio.

Here’s how it unfolds: In instances where stock markets are performing well and experiencing consistent growth, certain segments of the bond market might concurrently be undergoing declines. If your investments were solely concentrated in bonds, you could potentially incur losses. Yet, if you had established a proper diversification strategy encompassing both bond and stock investments, you could minimize the extent of your losses.

Through ownership of a spectrum of investments spanning distinct companies and varied asset classes, you can offset losses in one sector with gains in another. This approach maintains the growth of your portfolio in a stable and secure manner over time.

How Can I Start Investing?

Initiating your investment journey is relatively straightforward, and substantial funds aren’t a prerequisite either. Here’s the process to determine the most suitable type of beginner investment account for your needs:

• If you possess a modest starting capital but wish to avoid the responsibility of selecting investments, you could opt to initiate your investment journey through a robo-advisor. These automated investment platforms guide you in allocating your funds into pre-constructed, diversified portfolios that are tailored to match your risk tolerance and financial objectives.
• Should you lean towards conducting hands-on research and personally selecting your investments, you might find it preferable to establish an online brokerage account, allowing you to meticulously choose your individual investments. For newcomers, it’s important to remember the ease of diversification offered by mutual funds and ETFs.
• Alternatively, if you favor a more hands-off approach to investing, with the added assistance of a professional, consider consulting a financial advisor specializing in assisting new investors. Collaborating with a financial advisor enables you to cultivate a relationship with a trusted expert who comprehends your aspirations and can aid you in both the selection and management of your investments over time.

No matter your chosen approach to initiate investing, remember that investing is a venture that spans the long term, and the most substantial rewards emerge from consistently investing over a duration. This entails adhering to an investment strategy regardless of whether markets are experiencing growth or decline.

Start Investing Early, Keep Investing Regularly

“Successful investors often establish wealth methodically through consistent investments, such as automated payroll deductions or scheduled transfers from a checking or savings account,” explains Jess Emery, a spokesperson for Vanguard Funds.

Regular investment practices enable you to capitalize on natural market fluctuations. By consistently investing a set amount over time, you acquire fewer shares when prices are high and more shares when prices are low. This can potentially lead to a lower average cost per share, a concept known as dollar-cost averaging. However, Emery emphasizes that the effectiveness of dollar-cost averaging hinges on your willingness to persist with investments during market downturns.

It’s crucial to bear in mind that no investment comes with guaranteed outcomes, but well-calculated risks can yield rewards.

“Over the past 30 years, an investment in the S&P 500 would have yielded a 10% annualized return,” notes Sandi Bragar, managing director at wealth management firm Aspiriant. Bragar adds, “Missing the 25 best single days during that span would have resulted in only a 5% annualized return.” This serves as a reminder not to hastily sell your investments when the market experiences a downturn. Predicting when stock values will rebound is arduous, and significant market gains have often followed significant losses.

A solid foundation for successful investing begins by investing in yourself. Educate yourself about various retirement account options, establish a secure emergency savings fund, devise a strategy for managing student loan debt, and with these vital financial tools in place, you can confidently embark on your investment journey. By putting your available funds to work today, you’re taking steps to secure your financial future.