In the world of finance, investing means committing money to a particular asset or security with the expectation that you’ll gain a profit from the principal amount in the future. People invest in stocks or bonds to, in a sense, grow their money.
Some even say that channeling your extra funds toward investments is more effective than merely putting your savings in the bank. This is because you have the potential to earn more from your cash through investing.
According to InvestmentZen.com, the average net worth of American households (age 35-44) is $35,000, which is relatively small when you consider the surging prices of goods and inflation. This is why you need to think of ways to gain more income streams, and one of that is through investing.
Here are a few tips on how to start investing based on your net worth:
1. Determine Your Investment Goals and Preferences
The first thing you should do after deciding that you want to try your hand at investing is to list down the financial goals you want to achieve.
When working with brokers, whether traditional, online, or robo-advisors, you’ll be asked for your specific objectives, so you should prepare them before you approach a professional to support you.
Moreover, you also need to determine your preferences. Some people are more hands-on when it comes to handling their money. They want to be on top of all aspects of their investment, from studying the right assets to invest in monitoring the progress of their portfolio.
On the other hand, there are those who prefer putting in the money and leaving it to grow. Identifying your investment preferences can give the brokers and financial advisors you’ll work with an idea of how much support they should provide you and your portfolio.
2. Save Money for a Target Principal
You should also have some money saved up for the principal amount that you’ll funnel into your investments. You can do this step before or after determining your financial goals and investing preferences.
The cardinal rule for investing is to save up for a considerable amount. This is because profit grows exponentially with investments, so you gain more when you put in a lot of money.
Moreover, knowing how much funds you put into your portfolio is crucial in calculating your profits and assessing whether a particular asset or security is lucrative.
The primary objective of investing is to earn from your money, so you must keep track of the amount you invest and how much you’re gaining from it.
3. Learn About the Different Types of Investments
You should also study the different investment options available to you and how well they fit your financial objectives. By understanding the various types of assets and securities, you can create a diversified portfolio, which helps balance the risk and reward of your investments.
These are the top three investment types:
- Stocks – This asset entails purchasing shares in a company. With this, ownership of the enterprise is divided into stocks, with investors taking up the financial fractions of the business. You earn through dividends, which is the distribution of profits, or through buying and selling in the stock market.
- Bonds – With a bond, you are loaning a company or government institution your money for their development. You earn through the interest that’s added on top of the principal amount that these entities have to pay.
- Mutual Funds – Mutual funds are ideal for people who want a less active approach to investing. Think of this investment as a package with a mix of stocks and bonds. This way, you don’t have to spend too much time studying each asset and security to determine what’ll work best for you.
4. Understand the Risks Involved
The difference between saving money in the bank and investing is that there are higher risks with the latter. However, you should also remember that there are greater rewards in the long run due to the possibility of your funds’ exponential growth.
Bonds and mutual funds are less risky than individual stocks. Nonetheless, you can also expect higher profits from buying shares.
Some common types of risks that you should mull over include:
- Market – Economic or market developments aren’t always a good thing, regarding investments. For instance, a surge in the value of a rival company may lead to a decline of the worth of your stocks in another organization.
- Liquidity – Liquidity pertains to the ability of your assets to be converted to cash at any given time. When you put money into stocks or bonds, there’s always the risk that you won’t be able to get your funds when you need them.
- Concentration – When you put all your eggs in one basket, you run the risk of losing everything if that container falls. This risk can be mitigated with a diversified portfolio that includes assets from various industries.
- Credit – This type of risk applies to bonds. It’s when a company or government institution can’t pay you back with the loan and interest.
- Inflation – Inflation happens when your money’s value or purchasing power decreases over time. This generally affects bonds because the interest rate, which is supposed to be your profit from the investment, will only be eaten up by inflation. Stocks aren’t influenced by inflation so much because companies can easily raise the prices of their goods and services to keep up with the demand.
5. Know the Fees for Investing Services
Lastly, understand the different fees that brokers and robo-advisors charge for their services.
Consult a representative about the fees involving trading, account maintenance, and transfers. You should know the inflow as well as the outflow of money involved in your investments so that you can monitor your profit accurately.
With the average net worth of Americans not being enough for basic needs, you need to find additional income streams to live comfortably. One way to do that is through investing, which allows you to earn profit from your money.
Follow these tips and get started on your investments for your future security.