As a beginner investor, getting started with the right information is crucial to letting go of your fears and beginning your investment journey with more confidence. In this article on investing for beginners, we delve into some essential things to know.
Jump to a section
- Why investing is important
- What to consider before investing
- Some investments for beginners
- How much do you need to start investing?
Why investing is important
Truth be told, a savings account is not sufficient. Savings alone cannot help you reach financial freedom. Investing provides a clearer pathway.
Investments help you beat inflation, increase the value of your money, and ultimately build wealth. Your financial goals are also easier to meet when you set some money aside, either monthly or annually and leave it to compound.
Compounding is when an investment generates earnings or dividends, which are then reinvested. Your investments generate earnings from previous earnings, so you are never at a loss.
What to consider before investing
Before taking any decision, you want to consider a few things:
First, the money you choose to invest shouldn’t come from your everyday spending. Know how much you can stash away and if you have enough left to survive and handle your daily bills.
Secondly, how risk-tolerant are you? How much you invest depends on your risk tolerance. Some people are high-risk takers, while some are more cautious.
Another thing is that you should have a defined goal. Map out your financial goals both for the short and long term. Note that it is totally fine if you don’t have a defined financial goal yet. Don’t let that stop you from beginning your investment journey.
You should also consider diversifying your investment portfolio to reduce the risk of loss and maximize returns.
Some investments for beginners
1. Mutual Funds
Mutual funds are when money is gathered from a pool of investors to invest in various financial instruments like stocks, bonds, real estate etc.
This is a portion of ownership in a particular company while you receive profit in the form of dividends at the end of the trading year, e.g. deciding to buy a share of Amazon.
Learn more about mutual funds and stocks.
3. Index Funds
This is a portfolio of mutual funds, exchange-traded funds, or stocks designed to imitate the structure and performance of a financial market index. Index funds generally have lower fees and tax advantages than actively managed funds.
4. Exchange-Traded Funds (ETFs):
Like mutual funds, this is a group contribution by investors to invest in a bag of securities that are traded on an exchange. Unlike index funds, ETFs can be traded throughout the day. Index funds can only be traded at the end of the trading day.
Learn more about ETFs.
5. Fixed Income Securities (or Fixed Deposit)
This type of investment pays the investor fixed payments until its maturity date. When the investment matures, the investor is paid the principal amount they invested.
6. Bonds and Certificates of Deposits (CDs)
Certificates of Deposits (CDs) are similar to regular savings accounts but offer a slightly higher interest rate in exchange that the investor agrees to let the financial institution use the money for a stipulated period. This can be as short as six months or as long as ten years.
Bonds are like loans. Government or high-end companies issue them to raise money to back them up. The difference between CDs and Bonds is their interest rate.
7. Real Estate
This is one of the most popular investments out there. After all, buildings and lands mostly tend to appreciate (increase in value). Real estate investments are more than just selling buildings; you can get other sources of income from rent or leasing.
8. Investment Apps
Knowing the best investment apps to use is essential to building your investment portfolio properly. Cowrywise is one that helps you make financial decisions and build wealth from the comfort of your smartphone. Save, accumulate interests and securely access investment products such as mutual funds, etc.
How much do you need to start investing?
One thing some people get wrong is thinking only rich people invest. This cannot be farther from the truth because you don’t need large amounts of money to begin.
Some experts recommend investing about 20% of your earnings. This may not be realistic for everyone because you need to ensure your basic necessities, i.e. food, rent, and other utility bills, are sorted.
Decide to set a certain amount, even if it’s little and increase it as you get more comfortable with risks. Dig deeper into this with our detailed guide on how much you should save and invest.
How you can start investing
Start with as little or as much as you can but never throw in all your income at once. The biggest investors didn’t start overnight. It requires patience and taking calculated risks.
You also need to ensure that you are in the best financial shape and that you have an emergency fund. This is so you don’t panic and withdraw your investments.
Think of investments as saving for your future, retirement, or short-term goals like buying a car or building a house. Whatever you save now is what will eventually accumulate and provide the financial safety net you desire.
Diversifying your portfolio, as earlier mentioned, is also a way to fast-track. Spreading a portion of your earnings is a good way to get started.
Finally, never neglect the place of conducting proper research before diving into an investment. Reading this article is a good start. 😉
Investing is not a simple path, but you can ease your way into wealth with the right knowledge and foundation.
Watch this video to learn more about investing in mutual funds as a beginner.
Start your investment journey with Cowrywise today.
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