blurred house in foreground with coins in background

What Should A Beginner Invest In?

The biggest misconception about investing is that it's reserved for the rich.

That might've been true to some extent 10 years ago. But that barrier to entry is gone today, knocked down by companies and services that have made it their mission to make investment options available for everyone, including beginners and those who have just small amounts of money to put to work.

Investing even minimal amounts can reap big rewards. Here are 7 ways you can start investing with little money today.

For many people, the word "investing" conjures up images of men in suits, monitoring the exchange of millions of dollars on a stock ticker.

I'm here to tell you: You don't need to be the Wolf of Wall Street to start investing. It's okay if you're more of a mouse of Main Street. Even if you only have a few dollars to spare, your money will grow with compound interest.

The key to building wealth is developing good habits—like regularly putting money away every month. Swap out the barista-made cappuccinos for coffee at home and you could already be saving more than $50 a month.

Once you have a little money to play with, you can start to invest.

In 2020, you can get a date, a ride or a pizza with the swipe of a smartphone screen. Investing is no different. If you can automate your bills, why not your investments? It's just as easy.

With a robo-advisor or savings account, you can make your money work while you play. With a stock trading app, you can play with a little money and learn valuable investing lessons at the same time. Just like Halloween costumes, investing comes in many different forms. It shouldn't be a scary word.

With so many different options, investing for beginners is simpler and more straightforward than ever before.

hands exchanging house and money

Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labour in the future. Investing is a means to a happier ending. Legendary investor Warren Buffett defines investing as "…the process of laying out money now to receive more money in the future." 1 The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.

Let's say that you have $1,000 set aside, and you're ready to enter the world of investing. Or maybe you only have $10 extra a week, and you'd like to get into investing. In this article, we'll walk you through getting started as an investor and show you how to maximize your returns while minimizing your costs.

Many of us believe that there's only one way to make money—by working for it. Either you're paid to provide a service, or you earn from running your own business.

However, there's a second but less popular way to make money—making it work for you. This entails investing your money so that it earns more money. When you invest, your money earns interest over time, or you buy an asset and sell it later for a higher price when its value has increased.

Only a few invest, though. The 2017 financial inclusion survey found that only one in every five adults in the Philippines have some sort of investment.

Investing may seem daunting at first, especially if you get started when the market is experiencing a crash, but it doesn't have to be a terrifying ordeal. If you do your research and due diligence, you should be well on your way to a healthy and robust financial future. Do you want to learn how to invest money but don't know where to begin? We've put together this guide for beginners to help you grow your hard-earned money, even when the market gets rough.

It's never too early or late to start investing! Learn how to invest in stocks, bonds, mutual funds, index funds, real estate, and more. And find out how to analyze companies and supplies to see which are worth your investment dollars.

Getting started investing when you're a beginner can be plenty intimidating at first. 

The learning curve combined with the fact that you are putting your own money at risk is often enough to scare many ordinary people away from one of the safest ways to financial freedom.

However, even the most successful investors had to start somewhere, and it's never too early to start planning for the future and learning how to invest.

In this beginner's guide to investing, we'll cover how to start investing, but first, how to create an investment plan that is right for you.

You need to invest your money. It only doesn't make sense not to. Even if you only invest 5% of your money, it would still be worth it.

You understand that investing is smart and that a lot of people have made a lot of money doing it. The problem is, you never took an investment for beginners class, you're scared to lose all of your money, and you don't want to do the work.

The good news is, we're about to tell you that all of your concerns are unnecessary.

You can understand investing, and if you read this whole guide, you'll have the basics you need to get started. You also don't have to do all the work, nor do you have to give away all of your gains to avoid doing the work. You'll be relying on automation and letting the computer do it for you.

Studies show that millionaires do not depend on only one income. They have at least seven streams of income. How do they do that? Simple. They invest. This article is the beginner's guide to investments that covers passive income, importance and benefits of investing, things you need to do before you put up capital and the legitimate investment options that are available in the Philippines.

Newsflash for investing newbies: You don't need a PhD in finance to start saving for retirement or other long-term goals.  

But you can't rely on beginner's luck, either. You need to learn and implement some basic investing concepts. Keep it simple. Even acting on "Investing 101" strategies will help you achieve goals like saving for a home, boosting your SMSF so you can retire in style, or becoming a millionaire.

 

Understanding Investing

Investing is using your money in a way that you can expect to earn extra income. It is like putting your hard-earned cash into work with the hope that you reap the returns later. Thus investing involves two things, the risk that you take when you commit money to an investment and the potential return that is expected in exchange for taking that risk.

Investing allows you to get the most out of your active or passive income. Using your savings as capital to fund a small business is a type of active income; you need to put in the effort to keep the income going. For average Pinoy, most of the earnings are from active income either through employment or business. But we only have 24 hours each day, and that is a fact that puts a limit on what you can earn.

Many people use the term "investment" rather loosely for several things, despite not wholly understanding investments for beginners.

A newly bought BMW can be labelled as an investment. Buying MAC Cosmetics instead of the local brand is often considered an investment in quality makeup. You might even be guilty of "investing" on the latest mobile phone.

With these labels, there's a fine line between the difference between investing and splurging. By learning about the real meaning of investment, you can figure out exactly when a purchase becomes an investment.

An investment, as defined by Investopedia, is "an asset or item that is purchased with the hope that it will generate income or will appreciate in the future."

Based on this investment meaning, there are two keywords to remember: time and appreciation. The goal of any investment vehicle is to grow your money over time.

Let's say you are planning to invest in real estate. Only buying a house to live in cannot be called an investment because it does not automatically generate money.

But if you buy a house to rent it out, then it becomes a viable investment because it provides you with money for your future needs.

There has to be a return on investment (ROI), which is a performance measure used to assess how efficient an investment is. The higher the ROI, the more profitable your investment is.

Why Invest?

The illustration below shows a $1,000 investment over 30 years and compares it to what you would earn with a checking account and what you would earn with a savings account.

With an investment account on average, you can expect to earn over 19,700% more as compared to a checking account.

When you do put your money to work for you, you open up multiple income streams. You get something extra on top of what you earn from work or from the business.

There are many benefits when you start investing, including:

  • Meet financial goals faster. When you have other ways to earn, you can accumulate money quicker than when you only rely on one income stream. You can then be able to achieve goals and fulfil dreams in life.
  • Build wealth. Having an extra means to get money helps you acquire more assets that boost your net worth. By building your wealth, you're prepared for any emergency and retirement, and you may even have a way to leave an inheritance to your heirs or the charity of your choice.
  • Money habits. When you've started early in life, you would've developed the skills in managing your personal finances well such as budgeting, saving, and setting aside cash for any opportunities to grow your money that come your way.
  • Compound earnings. Investing long-term takes advantage of compounding of returns, which are a way for you to get the most out of the growth of your money. As you save, the returns that you get pile up over the years.
  • Combat inflation. When you put coins in a piggy bank, the value of your savings remains the same, but it's worth lessens by the passing of time because of inflation, which is the general increase of prices that chips away from your money's ability to purchase goods and services. Investing allows you to preserve its worth by providing earnings that match or exceed the pace of inflation, making sure that you will still have the same purchasing power in the years to come.
  • Opportunity cost. Missing the chance to invest would mean that you're depriving yourself of potential earnings that you get from your spare cash.

How to Invest Money Wisely

Understand Which Type of Investor You Are

Before you begin investing, you need to know how you want to invest. You can hire a hedge fund manager or get your feet wet by passively investing in index funds through a robo advisor.

There are generally three types of investing styles.

Pay Off Bad Debt and Avoid Money Traps

Don't even think about making any significant investments before you have paid off the unnecessary debt. I'm not talking about your home mortgage or student loans. These things shouldn't hold you back from starting to invest, but if you have "bad" debt from credit cards that will get you in trouble with interest payments, pay that off before you put money in the stock market. 

Speaking of trouble, don't fall into the common money traps. I see people of all ages trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house, you name it. 

I call these money traps because they are things that will take all your money, so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.

Create an Emergency Fund Before Investing 

If you have figured out how to spend your money wisely, you have probably figured out how to save it. An emergency fund is part of your savings that you set aside in case of an emergency. 

It's a good idea to put 3-6 months of your living expenses into your emergency fund (it can just be in a savings account) should something crazy happen, like I don't know, a pandemic! 

If your car breaks down, you get laid off, or you have unforeseen medical expenses, you will have the funds you need. An emergency fund will also come in handy in case of a recession. 

Even if you don't have to tap it, you will have peace of mind knowing there is a cushion available if you need it.  

Learn the Investing Basics

You wouldn't jump in the ring without knowing the basics of boxing, so you shouldn't jump in the stock market without knowing the basics of investing for beginners. 

Before you begin building wealth, it's essential to understand the fundamental goal of investing as well as the necessary process that you will use to reach that goal.

At the most basic level investing is all about buying $10 worth of value for $5.

When you are able to buy a company for less than its actual value, the value of your investment will grow over time – this is the ultimate goal of investing. 

Utilize Investing Resources for Beginners

I am a firm believer that the most important thing you can do is get an investing education. That's the secret to successful investing for beginners. In addition to the posts I shared above, there are plenty of resources available if you want to learn more about the stock market and how to succeed as an investor.

These resources include things such as books, blogs, podcasts, apps, investing software, and more. In the following sections, we'll cover some of the best investing resources available right now that you can use to grow your investing knowledge.

Decide What Type of Investment to Make

Next, you need to decide what type of investments will help you accomplish what you have set out to accomplish. There are several different types of assets that you should be aware of before you start investing your money. 

But let's focus on some of the most common types of investments for beginners. These investments include:

Stocks

When you purchase an individual stock, you become a partial owner of the company whose stock you bought. That means when the company makes money, so do you, and when the company grows in value, the value of your stocks grows as well.

Investing in stocks is by far the most rewarding investment option since it allows you to profit from owning any publicly traded company that you wish to invest in.

On average, the entire stock market grows at a rate of about 7% a year, but it is possible to achieve much higher returns by investing in hand-selected individual companies.

Bonds

Bonds can be purchased from the US government or from individual companies. Rather than buying ownership in a company, bonds essentially allow you to "loan" money to the government or to a company in exchange for modest returns. On average, bonds offer a return of 2%-3% per year.

Those returns aren't great, especially if you're getting close to retirement and don't have 40 years to grow your money.

Investment Funds

Investment funds are a basket of stocks that are overseen by a fund manager. While these funds are built and managed by so-called "financial experts", they typically have a hard time beating the market when you factor in the fees that fund managers charge to those who invest in their fund.

You'll have a much easier time (and more fun!) learning how to invest your own money rather than relying on some mutual fund manager who can't beat the market.

Annuities

Annuities are typically used to supplement retirement income and lock down a regular, monthly payment. They are a contract between an investor and an insurance company where the investor pays a lump sum in exchange for periodic payments made by the insurer.

While annuities may be helpful for some retirees, they are not an ideal investment option for beginner investors.

 

How Much Should a Beginner Invest in the Stock Market?

Ultimately, you want to invest as much as you possibly can throughout your life.

With that said, it's understandable if you want to take things a little slower starting out while you learn the ropes. When I first started out investing, I was barely making enough to survive off of and definitely didn't have a ton of extra cash to throw into the market.

investment growth with coins with house

The reality is that even as little as $500can be enough to kickstart a successful investing career. Thanks to compounding interest, $500 can grow into a fortune given enough time.

Most stocks are priced below $500 per share, with many stores being priced below $100 per share, and today, you can even buy parts of a percentage of a company's stock. 

While the price of a share alone does not tell you how much of a bargain you are getting the fact that most claims are priced affordably makes it easy for beginner investors to make small investments in the market when they are first starting out.

Invest as much you are comfortable with and invest consistently. If you do this, you'll be on the right track to building up a healthy sum of money over the long-run.

How Do You Manage Risks In Investing?

So if risks are part of investing, what are the things that you can do to manage them? First, understand them. The more you know about them, the better informed you would be in making a decision. For example, index funds have good and bad years, and experts recommend that you invest long-term to get the average returns over the years.

Second, make sure that you know and understand your risk appetite. How much of it can you take? The best investment out there is one that is a perfect marriage of the inherent risks and your risk appetite.

 

 

 

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