Investing can be scary for newbies to the financial markets. With so many investment options and jargon, it’s essential for beginners to get the basics right. Here are the investing basics everyone should know:
Financial Planning
The first and most important step in the investing journey is to have a financial plan. This plan should outline your short term and long term goals such as buying a house, funding your child’s education or saving for retirement. Once you have clear financial goals you can then choose the right investment strategy and asset allocation to achieve those goals
Monthly Cash Flow
Knowing your monthly income and expenses is key to financial planning and investing. Knowing your cash flow will help you determine how much you can realistically put aside for investments without compromising your daily financial commitments.
Risk and Returns
Every investment has some level of risk and it’s important for beginners to know their risk tolerance. Higher risk investments like stocks have higher returns but also higher chance of losses. Lower risk investments like bonds or savings accounts have lower returns.
Investment Diversification
The saying “don’t put all your eggs in one basket” applies to investing. Diversifying your portfolio across different asset classes like stocks, bonds, real estate and commodities can help reduce risk and potentially increase your overall returns.
Compound Interest
The concept of compound interest is a basic one that every beginner should know. When you reinvest your investment earnings, the returns you earn can earn returns and so on and so forth leading to exponential growth over time. Starting to invest early and letting your money compound can have a huge impact on your long term wealth.
Asset Classes
The investment universe is vast with many asset classes to choose from, each with its own risk return profile. Beginners should get to know the major asset classes including cash, bonds, stocks, mutual funds, ETFs and alternative investments like real estate and commodities.
Investment Vehicles
Once you know the asset classes you’ll need to learn about the investment vehicles available such as individual stocks, bonds, mutual funds and ETFs. Each of these vehicles has its own characteristics, fees and tax implications which should be considered carefully.
Investment Strategies
There are many investment strategies to choose from, from passive index investing to more active ones like value investing or growth investing. Beginners should research and know the different strategies to determine which one fits their investment goals, risk tolerance and time horizon.
Dollar-Cost Averaging
Dollar-cost averaging is a simple but effective investment strategy where you invest a fixed amount of money at regular intervals regardless of the market conditions. This can help smooth out the impact of market volatility and reduce the risk of investing a lump sum at the wrong time.
Rebalancing
As your investments grow and market conditions change, you need to rebalance your portfolio to maintain your target asset allocation. Rebalancing means selling the investments that have grown more than others and using the proceeds to buy the investments that are underweight in your portfolio. By knowing these basic investing concepts, beginners can get started with their investment journey. Remember, investing is a long term process and you need to approach it with patience, discipline and willingness to learn. Seek guidance from financial professionals, read reliable sources and start small to build your confidence and expertise over time.
