Investing, markets, financial planning – this is what we do every day. Sometimes it’s easy for us to take for granted the level of understanding those NOT in the industry have. Unless you’ve really taken an interest in the markets or set aside time to study them, you may not have a total understanding of what investing is, everything involved with investing or what different types of investments are out there.
Today, we wanted to go back to square one and tackle the basics of investing.
What Is Investing?
This is Investing 101, meaning we’re going to start by defining what exactly investing is. In its simplest form, investing is the process of giving money to another entity like a publicly traded company or government, with the hope that they will return more money to you (a profit) at a later time. While it sounds simple enough, giving money to another with the expectation of gaining more in return introduces the idea of weighing risk versus reward.
Why Should You Invest?
Due to inflation, the value of a dollar in your hand (or under the mattress) is continuously deteriorating – which is what makes investing an appealing choice for many. $300,000 today may be able to buy you a house here in Monmouth County, but 10 years from now it may not. The idea is to put a certain amount of your dollars in a place where they’re expected to earn more in the future (assuming a positive return is earned) than a dollar left sitting in savings.
Common Types of Investments
This is certainly not an exhaustive list, but below are a few of the most common types of investments along with a brief description of each.
- Stocks: Giving your money to a specific company, earning you a share or piece of the company in return.
- Bonds: Loaning your money to a government or other issuer, with the agreement that you will receive that amount back with interest at a later date.
- Mutual Funds: Using a professional money manager, pooling your money together with other investors and purchasing a group of stocks, bonds or a mix of both in a single transaction.
- Index Funds: A type of ETF or mutual fund that aim to mirror the performance of the index they’re tracking (such as the S&P 500).
- Exchange-traded Funds: Investment fund that trades on an exchange, like a stock. ETFs are similar to mutual funds except ETF shares can be bought and sold throughout the trading day. Mutual funds trade only at market close.
What Is Risk?
According to the Securities and Exchange Commission, risk refers to “the degree of uncertainty and/or potential financial loss inherent in an investment decision.” How does this relate to investments? In general, the higher the risk of an investment, the greater the potential reward. Every investment vehicle and product comes with its own set of risks, from determining how quickly an investor will be able to access their money when they need it, to figuring out how fast their money will grow where it is.
Getting to know your own personal risk tolerance is a constant challenge. Everyone has a unique risk tolerance specific to just them. Common factors like time horizon or liquidity needs can play into how much risk a person is willing to take.
Another factor could be considering how much money you’re willing to risk losing without affecting your lifestyle or jeopardizing your needs.
There is MUCH more to the world of investing than we’ve touched on today. This was merely the basics of Investing 101. If you have more questions about investing, or different types of investments, feel free to reach out. We would be happy to speak with you and answer any questions! Click here to schedule a phone call with one of our team members.