The art of investing is an indispensable tool for any one who wants to build wealth. The benefits of this tool include; the potential for higher returns, most investments outperform inflation, assurance of regular income and it can be tailored to your changing needs. What most persons don’t know is that the earlier you start investing, the better it will be for you. This is because investing early affords you a longer time to grow your wealth and explore riskier options. Interestingly today, many investment vehicles can be used to reach your wealth goals.
In this article, I clearly explain 3 carefully selected investment types that would be suitable for a beginner investor. Before you dive into them, it’s important that you note these 3 things about investing.
• Understand Your Risk Appetite
Investing comes with levels of risk. Different classes of investment have various attending levels of risk. You need to understand the kind of risk involved in an investment type and whether you are willing to take it; because putting your hard-earned money in an investment vehicle that is not suitable for your risk appetite can be disastrous. We have the conservative investors – who take a little risk, the investor who takes moderate risk and the aggressive investor who takes high risk; knowing the kind of investor you are in terms of your risk appetite, is like the biblical truth that can set you free.
• Diversify, Diversify, Diversify
You may have heard the saying, don’t put all your eggs in one basket. When you diversify, you are investing in a variety of options, thereby obeying this important investment commandment of not putting all your eggs in one basket.
• Use the power of compounding
This happens when you use the returns from your investment to re-invest. George Clason, the author of “The Richest Man in Babylon” puts it this way, ‘Every gold piece you save is a slave to work for you. Every copper it earns is a slave to work for you. Every copper it earns is its child that also can earn for you. If you would become wealthy, then what you save must earn, and its children must earn, that all may help to give you the abundance you crave. When you compound in the case of investing, the results can be magical over time.
3 Investment Types for Beginners
The stock market also called the equity market, is the meeting point of buyers and sellers of stocks. It is a collection of markets or exchanges where regular activities of buying and selling and issuance of stocks take place. So when investors invest in the stock market, they usually buy or sell stocks. When investors invest in stocks, they automatically own a piece of the company they invest in; and as a result, they become entitled to the future profit of the company.
A beginner investor can invest in the stock market and have steady returns for himself. It is simple to start too.
How Do Investors Make Money in the Stock Market?
Buying stock gives you two benefits. First, it entitles you to earn from future profits of the company paid as dividends to shareholders.
Second, you benefit from capital appreciation. Let me explain this, if you bought a stock at $100 and after 1 month, the stock rises to $130. The difference between your buying price and the current price of a stock, is your profit or loss. So in this instance, the $30 difference is your profit.
There is a lot of volatility in the stock market and as a result, some stocks can rise within a short period of time. Have you seen how the stock market allows you to earn profit within a short period?
Finally, for you to be able to invest in the stock market, you have to register with a brokerage firm, open an account and fund it, then you are good to go. Also, you must have a plan to invest. Remember the risk appetite, diversification and compounding you learnt about earlier? You will need them here.
Here is another very good way a beginner investor can invest. A mutual fund is a collection of funds by different investors and managed by one person, usually a portfolio manager. As a direct investor in the stock market, you have to pick the stocks to buy from thousands of stocks. This is not the case in mutual funds, where the task of picking the type of investment and allocation of capital is done by the fund manager, who is paid a management fee in exchange for managerial services.
How Do Mutual Funds Work?
The portfolio manager gets funds from different sets of investors. The fund manager then invests this money in predetermined types of investments, and pays returns to the investors on a prearranged basis.
Also called fixed income instruments, bonds employed by governments or companies to raise money by borrowing from investors. These are debt instruments issued by either a government or its agency or a corporation, to investors who lend money to the issuer. The issuer promises to pay fixed interest during the duration of the bond. In bonds, the interest to be paid is fixed, this makes it less risky compared to stocks.
The discussed investment types are good for anyone who wants to start an investment ride. Investing is a lifetime journey and to be successful, you must be willing to learn and grow your knowledge base; with these, you can never go wrong.