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
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.
What is a stock?
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.
The rewards & risks of stocks
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
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.
What is a bond?
The risks & rewards of bonds
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
What is a mutual fund?
A
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.
How real estate investing works
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.
A beginner's guide to building an investment portfolio
What are asset classes?
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
You may be most familiar with the
What is asset allocation?
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.
What is diversification?
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.
How are asset allocation & diversification different?
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.
What is dollar cost averaging & how does it work?
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.
What does risk tolerance mean?
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.
your money can factor into how much risk you can withstand.
Answer seven questions to uncover how your risk tolerance
shapes your investment style.
FAQs: Addressing common investing concerns
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.
What if I don’t have enough money to invest?
Generally, you can start
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 betaxed 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.
What happens if I’m not happy with how my investments are performing?
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
How can I avoid market volatility?
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
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—
Before investing, be sure to set investment goals
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.
Investing is generally considered a long-term venture. If you think you will need the money soon for planned or unplanned expenses, consider an
Get investing guidance from a financial advisor
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