investing

Everything you need to know before investing

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You're probably here because your best friend told you about the $2,000 she/he just made over the course of a month in crypto, your colleague told you about the importance of dividends income, or of course, you just finished watching The Wolf Of Wall Street.

So whether you're looking to turn $100 into $5,000 investing in Bitcoins, building up an extra income, or even better, being the next Jordan Belfort, well, you'll have to start with the basics.

If you didn't notice already, knowledge is power. But how do you know what knowledge to get? Which stocks should you invest in? What about cryptocurrencies? How do you start investing and make it worth your time and money? In this article, you'll learn that the right answer, is the one that suits you the best — so let's find that one out, shall we?

Key takeaways

  • Investing is giving an amount of money with the hope that it will grow and generate a return
  • It's important to figure out which type of investor you are before investing
  • There are many different types of investments, each with its own risks and rewards
  • Stock market simulators are a great way for individuals new to investing to get experience trading without putting money at risk

How to Start Investing: The Basics

What is investing? Investing is basically "setting aside" an amount of money with the hope that it'll grow and generate a return. 'Grow' here refers to investments multiplying in value, something we call capital appreciation — or it can be dividends, which is a distribution of a company's profits to its shareholders, usually paid quarterly. It can be in the form of cash, shares, or other assets. When a company earns a profit, it's normally reinvested back into the business (to help it grow), but sometimes the board of directors will decide to pay out some of that profit as a dividend to shareholders.

What Kind of Investor Are You?

The first thing you need to do before investing is to figure out what kind of investor you are, commonly known as "investor profile". So what is an Investor Profile?

First off, you'll need to understand the key components that define your Investor Profile:

  • Financial goals: Ask yourself, what do I want to use my investments for? It could be to buy a home, a car, for retirement, or even to send your kids to college.
  • Financial situation: This is probably the most overlooked factor in investing. What is your annual income? What are your expenses? Can you afford to set money aside? For example, you shouldn't be investing to clear up your debts.
  • Time horizon: This is how long you're willing to wait before you see any return on your investment. Generally, the longer the time horizon, the riskier it is.
  • Risk tolerance: Similar to your financial situation, you should ask yourself whether you're ready to risk losing money or not.

Now that you know a bit more about the Investor Profile, it's time to find out which profile connects with you the most. Like I said earlier, we're really just covering the basics here, so you'll learn the 3 basic Investor Profiles:

1. The Conservative

The conservative investor places a higher value on security and liquidity than on profit. As a result, the conservative investor will have no tolerance for losses or risks, which naturally drives him or her to seek lower-yielding prospects in favor of higher-risk alternatives. In cases where the applications are riskier, the conservative profile values rescue power, or immediate liquidity, and would not be able to endure 15 or 30 days of waiting while their valuable assets drop in value. This profile seeks short to medium-term investments ranging from 0 to 5 years.

This is usually the type of profile for new investors — their profile might be subject to change after acquiring more experience.

  • Investment Portfolio: At least 80% put into Fixed Income and little or nothing in Variable Income.

2. The Moderate

It's safe to say that this one is the most balanced one of the 3. With one foot in both conservative and aggressive profiles, this profile has a higher tolerance for risks than the conservative but not as much as the aggressive; The investor would rather accept somewhat less liquidity and security in order to achieve the high-profit rates that are desired. This profile is seeking medium to long-term investments (5 to 10 years).

You might think this is the best profile, but the truth is that the best profile for you is the one that fits your situation the most. Keep in mind that they are all as good and useful as each other.

3. The Aggressive

The aggressive investor puts profits first and has a high tolerance for risk. This is generally a more experienced investor with more money who is willing to give up immediate liquidity in order to be more adaptable and tolerant of losses since she or he understands that greater gains will come in the long run. Long-term investments of 10+ years are what this profile is looking for, or comfortable with.

  • Investment Portfolio: More than 50% applied to Variable Income.

Online Brokers vs Robo-Advisors

Whether you're a conservative, moderate, or aggressive investor, when it comes to choosing where to invest, you'll have two main options: online brokers and Robo-Advisors.

Online broker

An Online Broker is a platform where you can buy and sell investments on your own. You'll need to do your own research into which stocks or funds to invest in, and you're responsible for all the associated risks. Online brokers don't mean you're all on your own though. Brokers like Fidelity Investments or TD Ameritrade offer lots of educational materials.

The upside to working with an online broker is that you have direct control over your portfolio and you can make decisions quickly. You also have access to a wide range of investments, including stocks, bonds, options, and futures.

The downside is that online brokers can be expensive. Fees generally start at around $10 per trade and can go up from there.

Robo-Advisor

A Robo-Advisor, on the other hand, is a service that builds and manages your portfolio for you. The Robo-Advisor will take into account your risk tolerance and investment goals and will recommend a portfolio that matches your profile.

A Robo-Advisor is a type of investment advisor that has emerged since the 2008 financial crisis. The first known Robo-Advisor was Betterment's Jon Stein and Eli Broverman, who sought to use technology to reduce costs for investors and streamline investment advice. Their objective was to make investing easier by using technological methods.

Robo-Advisors are a great option for investors who don't have the time or knowledge to manage their own portfolio. They're also a good choice for investors who want to invest in low-cost ETFs (we'll talk about those later). Fees start at around 0.25% and go down as you invest more money.

By now, you probably have a better idea of which type of investor you'll be. If not, don't worry, it's better to take your time to figure that out than to jump the gun and lose all of your money.

What is the best investment?

There is no one-size-fits-all answer to this question because it all depends on your individual situation and goals. Remember what we talked about earlier? That's right, your investor profile!

So let's talk about the different types of investments from the lowest risk to the highest:

1. Fixed Income

Fixed Income investments are very low-risk and provide a guaranteed return on your investment. They include things like CDs, treasury bills, and government bonds. The downside to Fixed Income investments is that they offer low returns. You can expect to earn around 2-3% on a CD or treasury bill, and 4-5% on a government bond.

2. Variable Income

Variable Income investments are riskier than Fixed Income investments, but they offer the potential for much higher returns. Some examples of Variable Income investments include stocks, real estate, and crypto. The upside to Variable Income investments is that they have the potential to generate much higher profits than Fixed Income investments. The downside is that they're also more volatile, meaning they can go up or down in value quickly.

3. Mutual Funds

Mutual Funds are a type of investment that contains a mix of different types of investments, including Fixed Income and Variable Income investments. Investing in a mutual fund is a good option for investors who want to spread their risk out among several different types of investments. In other words, mutual funds are a simple way to invest in a pool of equities, bonds, and other investments that are handled for you by an expert money manager — institutional investors are a great example of investors who use mutual funds to achieve this goal.

4. Exchange Traded Funds (ETFs)

ETFs are a type of mutual fund that trades on an exchange like stocks. This makes them very liquid, meaning you can buy and sell them at any time. The difference between ETFs and mutual funds is that ETFs are passively managed — this means the manager only buys and sells stocks to track an index. Mutual funds, on the other hand, are actively managed — this means the manager is constantly making decisions about what stocks to buy and sell.

ETFs are a great option for investors who want to invest in low-cost index funds; Index funds are funds that track the performance of a particular index, like the S&P 500.

5. Individual Stocks

An individual stock is a security that represents ownership in a particular company. When you buy a stock, you become a part of that company and own a piece of it. Individual stocks are high-risk, high-reward investments. The potential for profits is much higher than with other types of investments, but so is the risk.

6. Real Estate

Real estate is an investment that consists of buying and holding property for financial gain. There are two ways to invest in real estate: through rental properties or by buying shares in a real estate investment trust (REIT). Real estate is a good option for investors who want to invest in a physical asset. It's also a good option for investors who want to diversify their portfolios into different asset classes.

One key factor in real estate is the interest rate: When interest rates are low, real estate prices usually go up, and when interest rates are high, real estate prices usually go down, so watch out for this before investing.

7. Cryptocurrencies

Cryptocurrencies are digital tokens that use cryptography to secure their transactions and to control the creation of new units. They are a high-risk, high-reward investment. The potential for profits is much higher than with other types of investments, but so is the risk. The most popular cryptocurrencies are Bitcoin and Ethereum, and even Dogecoin, but don't say I recommended you that one though.

8. Hedge Funds

Hedge Funds are investment vehicles that use a variety of strategies to generate returns, including investing in stocks, bonds, and other types of securities. Hedge Funds are high-risk, high-reward investments. They're not suitable for everyone, but they can be a great option for investors who have a high-risk tolerance.

9. Private Equity

Private Equity is an investment in companies that are not publicly traded. This is a high-risk investment and is only suitable for investors who are comfortable with taking on a lot of risks.

10. Non-Fungible Token (NFTs)

An NFT is a digital asset that could be either music, videos, or even collectible. The asset is unique and can't be replicated. NFTs are a new type of investment that is still in its early stages. There is a lot of potential for growth in this market, but it is also very risky.

Stock Market Simulators

Stock market simulators are a great way for individuals new to investing to get experience trading without putting money at risk. A stock market simulator is a useful tool for investors looking to gain expertise in trading without risking their money. There are several different types of trading simulators available, some with and others without fees. The Market Watch simulation is completely free to use.

Simulators for the stock market allow users to "invest" in a portfolio of stocks, options, ETFs, or other securities via fantasy money. These simulators generally monitor stock price changes and, depending on the simulation, various noteworthy issues such as trading commissions or dividend payouts. Investors engage in virtual "trades" as though they were investing real money. Simulator users get to learn about the ins and outs of investing, as well as its highs and lows, without risking their own money. Simulators also allow users to compete with one another, providing an additional incentive to think carefully about their decisions.

What is the minimum to open an account?

In most situations, each time you buy or sell a stock, your broker will charge a fee. Trading fees can range from $2 to $10 per trade depending on the discount brokerage. Some brokers will charge no trade fees, but they make up for it in other ways. There are no charitable organizations that provide brokerage services.

These costs might outweigh the benefits if you trade frequently. These costs may add up and have an impact on your profits if you trade routinely. If you make frequent trades with a small amount of cash available to invest, investing in equities may be prohibitively expensive. Remember that If you want to make five separate purchases of five different stocks at the same time, you will be charged for each individual transaction, so be careful.

Consider that you invest your $1,000 in the stocks of those five businesses. If the fee is $10 and you trade 500 shares at a cost of $50 per trade, this will result in a net loss of $50. If you sold these five stocks, you would incur additional transaction expenses, increasing your total loss to $150. Traveling the distance between these five stocks (buying and selling) will cost you $100, or 10% of your start-up capital of $1,000.

Simply said, if your investments do not generate enough cash to cover this fee, you will start to lose money.

Additional information

Market Data

When you're looking for market data, you want to make sure you're getting information from a reliable source.

Market data can be used to help you make informed investment decisions. It can also help you track the performance of your investments over time.

There are several different types of market data, including price data, volume data, and open interest data.

Price data is the most commonly used type of market data. It shows the current market price of a security or investment. Volume data measures the number of shares or contracts that have been traded over a certain period of time. Open interest data measures the number of outstanding contracts for a particular security or investment.

Stock Quotes

When you're looking to invest in the stock market, you'll want to get a good sense of what stocks are worth. A stock quote is a snapshot of the market price of a particular security at a given point in time.

You can get free stock quotes from several different sources, including Yahoo! Finance and The Wall Street Journal.

The Bottom Line

It is possible to invest with a small amount of money if you are just getting started. It's more difficult than simply picking the appropriate investment (which is hard enough in and of itself), and new investors must be aware of their limitations.

You'll have to do some research to find out the minimum deposit criteria and then compare the commissions to those of other brokers. Chances are that you won't be able to cost-effectively purchase individual equities while still diversifying with a little amount of money. You'll also need to select the broker with whom you want to open an account.

Last edited: March 1, 2022

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