Investing for beginners: Basics terms & concepts to understand

If you think you’re the only one who is not investing your money, think again. There are so many reasons you may be reluctant to invest—everything from worrying you don’t have enough to invest or that you might lose your money if you do.

Could it be that basic investing concepts can be confusing and the jargon used to explain them intimidating? Take a few minutes now to learn the basics of investing so you are better equipped to make decisions that are right for you.

We'll cover:

• Basic investing terminology
  
  • Stocks
  • Bonds
  • Mutual funds
  • Real estate
  • Asset classes
  • Asset allocation
  • Diversification
  • Risk tolerance
• Common investing questions
  
  • What if I don't have enough money to invest?
  • Are there hidden fees associated with investing?
  • What if I'm not happy with how my investments are performing?
  • How can I avoid market volatility?

Gain the confidence you need to invest by learning a few basic terms. The more you know, the easier it can be to make sense of investing jargon.

Stocks, also called equities, are tradeable securities that represent a share of ownership in a company, and are bought and sold in the stock market. The stock market is a term used to describe the place where publicly-held companies buy, sell and issue shares of their company. Publicly traded companies use the market to raise money to grow and expand their operations by issuing stocks.

However small your slice of the pie, you technically become one of the business's owners when you purchase stock. The stock price reflects the value of the company, but it is determined by what investors are willing to pay.

When you buy stocks, you're likely hoping for one of these outcomes:

• You receive a portion of the company's profits in the form of a dividend (though not all companies pay dividends)
• Your shares appreciate—that is, you can sell them for a higher price than you paid for them

However, stocks do come with risks. Even though the stock market has a historical average return of 10%, there have been plenty of times when prices fell year over year. There are no guarantees a company will pay dividends or that shares ever will grow in value. Some businesses may fail no matter what's happening with the greater economy. Perhaps the company developed a product or service that didn't catch on or decided to invest in unprofitable markets.

With this in mind, stocks tend to be a better fit if you have a long-term investment horizon. When you're building assets for a retirement that's decades away, a temporary dip in your portfolio's value might not throw you off track. You have time for the market to pick up again and potentially regain lost ground.

Bonds, also known as fixed-income securities, are loans from an investor to a borrower—like a company or government—to fund their growth. When you buy a bond from a company or government, it will pay you back, plus interest.

Bonds are generally considered to be conservative. The interest on bonds is a relatively low but fixed rate, and interest payments to bondholders usually are made once or twice a year during the life of the bond, making them predictable. Plus, their default risks tend to be low—government bonds in particular have full faith and credit backing—making them more reliable than other investments.

However, bonds aren't without risk. In high interest rate environments, the price of bonds tends to fall. Additionally, the interest you earn may not always keep up during environments of high inflation.

A mutual fund is a type of investment consisting of a combination of stocks, bonds and other assets that is managed by professional money managers. Mutual funds are professionally managed by experts who research companies, know the markets and are responsible for making well-informed decisions. Think of a mutual fund as having your own built-in financial advisor who's managing your money and looking out for your long-term financial interests.

The prices of mutual funds fluctuate each day based on market conditions and demand. Most mutual funds have some amount of investment risk and volatility, and if you're willing to accept the risk of ups and downs in your mutual fund's day-to-day price, you may experience long-term gains.

Real estate investing could mean buying a rental property to flipping houses to investing in a real estate investment trust (REIT). It's a physical asset that can appreciate in value over time, providing investors with a solid return on their investment.

Real estate investing can require a lot of time and effort to find the right property and manage it effectively. Additionally, real estate investments are subject to market fluctuations. There's always a risk that the value of your investment could go down.

Despite these risks, real estate remains one of the most popular types of investments—making it a good option for investors who are looking for a long-term investment and have the time to put into it.

inflation_investments_1036x500.png

A beginner's guide to building an investment portfolio

Money is a tool that, if used wisely, can help you meet your needs and enjoy life to the fullest. Choosing the right investment portfolio is an important step toward that end. Learn more about portfolio components and how to invest in a way that supports your desired outcomes.


Read more

An asset class is simply a grouping of investments with similar characteristics. Equities (stocks), fixed-income (bonds), and cash (or its equivalent) are three asset classes every investor should be familiar with when considering an investment strategy. Another asset class you may hear about is alternative assets, which refers to tangible assets like real estate or commodities such as gold and oil.

You may be most familiar with the cash asset class. You use it to buy goods and pay for services, and it’s what you own in traditional bank and savings accounts. Cash offers a lower return on investment in exchange for its safety and guarantees.

Asset allocation is a strategy to help you minimize your overall investment risk by spreading your money across various types of asset classes, such as stocks, bonds or cash.

By holding investments in various classes, the gains in some of your holdings might offset losses in others. As a result, you may have a less volatile investing experience overall.

Diversification is an approach that helps spread your risk even further by allocating your investments within the same asset class. The idea is that if one of your investments is doing poorly, perhaps others that you own will make up for any losses.

An example of diversification would be investing in a variety of stocks from several different small companies instead of allocating your entire stock investment to one small company.

Asset allocation and diversification are both investment strategies, but the key difference is that asset allocation is the percentage of stocks, bonds and cash you invest in while diversification is about spreading your investments among the asset classes.

While asset allocation and diversification can help reduce market risk, they do not eliminate it. Diversification does not assure a profit or protect against loss in a declining market. That’s why many investors choose to work with a financial advisor they trust who can guide them to make better decisions with considerations based on their investment goals, time horizon and risk tolerance.

Dollar cost averaging is systematic investing of equal amounts at regular intervals, whether the market is up or down. Think about it as starting small and being consistent over time. Dollar cost averaging is a tried-and-true method for investing that helps reduce the impact that normal volatility can have on your investments.

With dollar cost averaging, you buy more shares when the prices are lower and fewer shares when prices are higher, resulting in a lower average cost per share. The goal is to reduce the impact of normal market volatility on the investment.

Dollar cost averaging doesn’t guarantee you’ll make a profit or prevent a loss, but it can help you remove some of the guesswork out of your investing decisions. It also might reduce the stress you may feel about investing.

Risk tolerance measures an investor’s ability to accept that investment values will fluctuate for a variety of reasons. Investors are generally aggressive, moderate or conservative.

A general rule of thumb is that the younger you are, the more aggressive you can be with your investment decisions because your investments will have longer to recover from the fluctuations of the market.

But that’s only if you can handle the risk. And age isn’t necessarily a factor in your ability to stomach market volatility. If you know you might worry during normal volatility, factor that in when choosing investments.

Since risk is part of investing, it's important to understand your tolerance for it. The good news is that investments offer a spectrum of risk levels, which allows you to make choices that best match your ability to stomach the risk.

What's your investing style?

You likely have goals for your money. How you want to use
your money can factor into how much risk you can withstand.
Answer seven questions to uncover how your risk tolerance
shapes your investment style.

Try it out

It may help you feel less intimidated about investing if you know that other people have the same questions that you do. Take a look and see answers that might inspire you to invest.

Generally, you can start investing with as little as $50 per month. Dollar cost averaging may make it possible to invest sooner because you’ll be investing with smaller amounts instead of having to save up a larger amount to invest at one time. It also can help reduce the risk that you’re investing at the market’s peak.

Some investors want to spend hours poring over data themselves in search of hidden treasures. Others climb aboard the bandwagon of the latest investment fad. Those investors pay fees, and so will you.

Simply put, investing costs money. There are fees tied to transactions you make, advice you might pay for, and the products you buy. For example:

• Fund companies charge an expense ratio to shareholders every year to cover administrative and operating expenses on their mutual funds.
• Cost basis, which is the original value or purchase price of an investment, is something you need to think about if you’re selling your investment because you may be taxed on any gains.

Generally, the longer you hold your investments, the more time they have potential to grow, which can help offset the fees you will pay. Your financial advisor can help you understand the fees associated with investing and develop strategies to reduce them when possible.

Investing your money is not a set-it-and-forget-it strategy. There are risks, the markets do fluctuate, your goals may change. For all these reasons and more you may want to review your investments at least once a year to understand how the investments you have selected are performing. Your financial advisor can help you with rebalancing, which is one way to take the emotions out of investing decisions and restore the mix of investments back in line with your original plan.

Remember that successful investing takes time. You begin, track your results and gradually increase your commitment as you learn more. It’s important to get started and be consistent, always keeping in mind that there could be ups and downs along the way.

For example, if you want guarantees, you may sacrifice potential earnings. You could choose to defer taxes, or you might be focused on beating inflation. No matter which investments you pick, there will be trade-offs.

When it comes to investing, one thing you do not want to be is emotional. If you get anxious or unsure when looking at your returns during market fluctuations, you might panic and sell off investments just before they start to bounce back.

That’s why it’s important that you think about time—not timing. If your investment strategy is based on long-term goals, you will be less tempted to focus on short-term fluctuations. Markets may dip, but historically, they have rebounded.

Before you start investing, consider how you are hoping to use the money, and when you may need it.

Let’s say you plan to save for your kid’s college education. How you invest your money can depend on whether your child is a toddler or a teen. Your plans for the money will have an impact on how you invest it. Plus, it will help you narrow down investment choices.

Setting a goal can give shape to your plans and make it easier to hold yourself accountable.

Investing is generally considered a long-term venture. If you think you will need the money soon for planned or unplanned expenses, consider an emergency savings account.

There’s no one-size-fits-all playbook for investing. Your decisions should reflect your unique goals and values, risk tolerance, and time horizon. And there’s no need to venture into it alone. Your financial advisor can guide you along the way.