Investing for beginners: The basics of how to invest your money

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Investing doesn’t have to be complicated. Here are the basics of investing for beginners.

Often, people will put off investing their money because it seems too complex or think that it requires a large starting sum. But this doesn’t have to be the case. Here’s a basic guide for those who are new to investing—and it doesn’t require a large bankroll.

Determine your investment strategy

Are you investing for a long-term goal, such as retirement, or for something a little closer, like buying your first home? Are you ok with making riskier investments, which can yield greater returns, or does the thought of a market slip give you the cold sweats? Do you want to be actively involved in managing your investments or would you prefer a more passive role? The answers to these questions will help determine if you should invest in stocks, mutual funds, or bonds—and if you should hire a fund manager or broker, or go it on your own.

The ways you can invest

There are many options available for you to invest your money. Here is a high-level overview:

Stocks.

When you purchase a stock, you are buying a share of ownership—however small or large—in that company. In general, a company’s stock price is determined by the company’s earnings.

In the long run, stocks have outperformed all other investments. From 1926 to 2010, the S&P 500 returned an average annual gain of 9.8 percent. That’s great if you’re in the market for the long haul. But if you’re not, stocks can potentially devastate your portfolio. In a single day in 1987—October 19—the stock market lost over 22 percent of its value. During the year 2009, stocks overall lost 37 percent. As part of your investment portfolio, stocks should be considered a long-term investment.

Stocks are generally put into categories based on three determinants—size (how much the whole company is worth), style (how the company interacts with the overall market), and sector (the industry the company is a part of)—with many subdivisions in each of these categories.

Mutual Funds.

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Mutual funds pool the resources of investors to buy a variety of investments. They make it easy to diversify your investment and typically require only moderate minimum investments.

Just as with stocks, there are many types of mutual funds to choose from, each fitting a different investing need and strategy. In general, you will invest in either a stock fund, which is a mutual fund made up of stocks, or a bond fund, which is a mutual fund made up of bonds. Each of these is further categorized depending on the type of stock or bond that is included in the mutual fund.

Bonds.

Bonds are issued by companies and governments as a way to fund their operations or projects. Essentially, you are loaning money that will be repaid to you with interest at a set period of time. In general, bonds provide the lowest yield of return because they typically offer the lowest risk. As with other investment options, bonds come in all shapes and sizes. Municipal bonds are especially popular as a tax shelter. The interest on these bonds, which are issued by state and local governments, is exempt from federal taxes and could even be exempt from state and local taxes.

Finding the right investment portfolio for you

Unfortunately, there is no magic formula for determining which investment strategy is going to provide you with the greatest return. There are some general investment guidelines to follow, however:

  1. Diversify. You know the saying, the one about eggs and a basket. This is especially true when it comes to investing. Spreading your money across several types of investments lessens your risk. But, to use two metaphors in one paragraph, don’t spread yourself too thin, either. Meaning, don’t diversify to the point where you aren’t seeing any movement in your portfolio.
  2. Factor in inflation. You have to add in the effects of inflation to truly understand how well your investments are performing. Inflation historically runs at around 3 percent annually. This means that a stock, with an average growth rate of 9.8 percent a year, that would have doubled your investment in a little over seven years will actually take 10 years when you factor in inflation.
  3. Stocks offer the highest yield potential. On the flip side, they also offer the highest loss potential. A well-balanced stock portfolio should generally consist of 15 to 20 stocks from seven or more different sectors.
  4. Investing should be seen as a long-term goal. Even funds that have had an off-year may be worth hanging on to if other comparable funds have had similar performance.

Ready to enter the world of investing?

mtree.jpgBefore making any investment decisions, you’ll want to do some research on your own or talk with a financial advisor to learn what options may work best for you and your investment goals.

This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.

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Source: MSN Money, CNN Money
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