The world of investing has never been more accessible. Because of rapid technological developments, people from a number of diverse backgrounds can grow their wealth by making shrewd investments. According to the U.S. Department of Commerce, our constantly expanding financial industry is the largest per dollar amount in the world. Because of this $1.5 trillion market, there are a number of compelling reasons to invest.
Probably the most significant one, though, is passive income. Passive income puts your money to work in a stock, bond or other asset, and it builds in value while you focus on other, probably unrelated things. Say you have $1,000. You can let that money stagnate in a savings account, where you’ll ultimately lose money over the course of time. Or you can take that $1,000 and put it into an investment with a 10% interest rate. After letting it sit for 10 years, the money would swell into a $2,593.74 sum.
A lot of the terminology in the financial world can be daunting and overwhelming, which helps explain why some may be wary about joining the market. However, there’s still a place in investing for beginners. The earlier people can join the investing game, the freer they are to take risks, build capital and face losses. Investing is by no means easy, but that shouldn’t scare people away. Instead, investing can open the door to a comfortable future.
How Does Investing in a Business Work?
As with most things in finance, investing can be complicated. It’s certainly not impossible, though, and people who are new to investing should be excited about the number of growth opportunities.
Before seriously considering investing money, there are some things to consider. First, prospective investors need to pinpoint the exact amount of money they have to put into something and understand that this money could disappear.
At the risk of sounding cryptic, nothing is really certain in the world of investing. Losses are a vital part of the market, and unexpected circumstances can negatively affect the money put into something. At the same time, those unexpected conditions can offer massive financial gains.
Invested money can easily expand or dwindle. No one can control the direction of markets, but the more that potential investors know about different companies, industries and trends, the better prepared they can be to secure hefty returns.
Business Insider framed the ways that Warren Buffet, one of the richest men in the world because of his investments, suggests new investors approach the market. It said that when people buy stocks, they buy a part of that company, however big or small. It’s necessary, then, for the investor to try on the shoes of the company’s owners and to learn more about the specific related industries in order to choose the right fit. Only when an investor feels confident about the direction of a company should they consider coming on board.
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9 Investment Strategies for Beginners
After a beginner investor has chosen a company, an industry or a fund, it’s time to think about how to implement an effective overarching strategy going forward.
There are many ways to invest in a business. As far as choosing which stock to invest in ultimately, new investors should consider three underlying tactics. According to the article Risk-Return Analysis of Dynamic Investment Strategies, they include:
- A hand in many pots. This framework, also known as a “directional” or constant-mix strategy, encourages investors to “invest a stable proportion of one’s assets in risky markets.” In other words, risky markets can offer massive returns and devastating losses, so with this model, it may be a better idea to spread money out among a number of companies.
- Going against the grain. Here, investors actively put their money in companies or industries that move against what the market favors. As researchers demonstrate, this strategy “will have a tendency to exhibit frequent small gains and less frequent large losses.” Investors shouldn’t expect a massive payday from this model, because it’s built more for stability.
- Trend-following. This is probably the most straight-forward investing model. It dictates that investors hop on an asset as it trends positively. Once the positive trend breaks toward the negative, investors cash out and move toward the next upward-trending option. Small losses, according to the researchers, can happen with some frequency, so it’s important for investors to pay close attention to the behaviors of the market to minimize lost funds.
These frameworks will help inform any successful strategy, so it’s important that new investors consider how they wish to approach the market.
Once a new investor picks the direction of their future purchase, they should consider these nine important investment strategies for beginners:
1. Target-Date Funds
These are funds that can allow investors to work toward a set retirement date. According to the Security and Exchange Commission of the United States, target-date funds are uniquely “designed so that the fund’s mix of investments will automatically change in a way that is intended to become more conservative as you approach the target date.” Riskier investments are a lot less desirable when people approach the age of retirement. As a result, target-date funds position investors’ money in more conservative places to give people the best possible cushion for their future.
This is a really common way of investing. Many established employers will offer their employees the opportunity to invest in their retirement. With this investment strategy, a certain percentage or flat rate is taken out of every employee’s paycheck. What’s more, a lot of companies will match the percentage that employees put into the fund. This allows your retirement fund to swell at consistent and proactive rates otherwise unobtainable. The IRS reports that employers can match up to 100% of an employee’s salary or a flat cap at $56,000 per year.
3. Roth IRAs
This investment strategy puts investors in a position to save for their retirement in a different capacity. In this context, investors can put money into a Roth IRA account where those funds won’t be taxed. Though that’s a major bonus to using this investment strategy, one downside may be that taking the money out pre-retirement is often difficult, and the penalties associated with doing so kind of cancel out the positives. It’s a good idea, then, to use these kinds of accounts as good places to start when thinking about retirement.
4. Mutual Funds
Mutual funds also typically require a significant amount to buy into. While 401(k)s can be considered as a kind of mutual fund, seeking them out independently can offer the same benefits as a 401(k) without the attachment to a specific employer. Further, a similar benefit to investing in mutual funds is that they provide an adequate tax-shelter to their members, according to the Wall Street Journal.
5. Exchange-Traded Funds (ETFS)
This type of marketing trading allows novice investors to go around the constraints of a mutual fund. In other words, investors can avoid a certain minimum investing threshold while they diversify their portfolios. As an article in US News said, these types of investing opportunities are “built like a mutual fund but trade like a stock,” giving the investor the freedom to move funds freely.
6. No-Transaction Fee Funds
This tactic enables the investor to buy and trade securities without any commission rate. A lot of stock options have trading fee rates, most often between 3%-7%, so when investors don’t have to commit to those percentage-based fees, they are given a better chance of coming out on top. Further, trading these kinds of options are a lot easier and seamless, since traders don’t have to keep track of the fees.
7. Real Estate
Buying land has historically been considered the safest investment strategy. The challenge for this kind of investment, though, is that it requires considerably more money up front. In order to make the investment profitable, the investor should put up a sizeable down payment to reduce their principal interest rate. The primary reason that investors have treated real estate as the safest investing strategy is because property – or the ownership of land – has been thought only to rise in value over time. Further, by owning land and improving property, investors can add value to their initial investment independently.
According to Entrepreneur, trading the raw materials that make popularly consumed products is an excellent financial strategy for first-time investors. They give further context to investing in commodities by stating that the process could be a high risk, high reward scenario because of the nature of “leveraged contracts, providing both big upside and a potential for large downside.” As a result, beginner investors should be careful about and carefully research the commodities contracts they look to sign.
9. Help from a Financial Advisor
Arguably the easiest way to learn more about sound and clever investment strategies would be to enlist a seasoned, professional financial advisor. For a fee, they can give you information on more obscure but potentially fruitful investment opportunities, and they’ll also be transparent about which prospects you should likely avoid.
On the other hand, one of the best ways to tap into the pulse of the investment market independently is to gain knowledge from seasoned professionals who have been there before. Point Park University’s flexible online Bachelor of Science in Business Management will prepare you to invest with confidence as a prospective business or financial analyst. For those with an entrepreneurial drive, our program will equip you with the tools to secure a lucrative and comfortable future.