Understanding the Basics of Investing

Understanding the Basics of Investing

If you’re in the beginning stages of thinking about how to invest, what to invest, where to invest and when to invest, you’re probably a little overwhelmed. That’s perfectly normal.

Published Thursday, November 6, 2014

If you’re in the beginning stages of thinking about how to invest, what to invest, where to invest and when to invest, you’re probably a little overwhelmed. That’s perfectly normal. There are a lot of options when it comes to using your money to increase your wealth.

First, before discussing those options, it’s important to understand that while investing and saving are related, they are very different processes from one another. Saving means putting money aside in a very safe, low- or no-risk account such as an FDIC insured checking or savings account. Certificates of deposit (CD) and U.S. Treasury Bills are also safe options for saving money. The primary goal when saving money is simply to preserve capital, or cash, so that it’s there when needed to pay bills or other expenses.

Investing, on the other hand, is using money to buy assets that are expected to generate substantial returns on that investment, therefore increasing wealth over time. There are many different kinds of investments, from stocks and bonds to coins and comic books. Even the best investment strategies can take time to grow wealth so it’s important to balance funds between safe, accessible savings and long-term investments that may be higher in risk but typically generate greater returns.

Again, there are many ways to allocate your money. The following investment options are some of the most common from which to choose.

  1. Stocks—Historically, stocks have been the best way to build wealth. When you buy stocks, you are investing in individual businesses. In other words, you are sharing in the ownership of that company. As a shareholder, you’ll enjoy a higher potential for growth over the long term. There’s also more of a risk with this type of investment because the performance of the stock is impacted by economic factors around the world.
  2. Bonds—Known as one of the safest investments because when you buy a bond, you’re basically lending money to the issuer of that bond (government, municipality, corporation, or federal agency). The issuer then pays back the loan along with a predetermined amount of interest. You’ll increase your wealth while enjoying more stability than with stocks.
  3. Mutual Funds—These are likely the most popular way for new investors to begin building their wealth. Typically set up by your workplace as a 401(k) or as an individual retirement account (IRA), mutual funds are made up of a mix of individual stocks, bonds and other investments that have been chosen based on the belief that they will perform in accordance with the goals of the investors.

All investments involve a certain amount of risk, and the assurance of a profit or the guarantee against loss is never a sure thing. Before getting started, be sure to do your homework. You may also decide to rely on a trusted financial advisor to help you select the best options and the best way to allocate your assets. For more information on the basics of investing, click on the following links:

http://beginnersinvest.about.com/od/investing101/u/investing_basics.htm

http://money.cnn.com/magazines/moneymag/money101/lesson4/index.htm

http://www.thestreet.com/story/11748100/1/how-to-invest--ways-to-make-your-money-grow.html

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