The Basics of Investing For Those Looking To Get in The Game
People fail to realize that in order to build wealth you have to invest, period! It’s imperative to get that in your head. In fact, the earlier you start the better. I remember making my first investment. It was during my junior year in college and I invested $1,000 in a mutual fund. Looking back, I should have started in high school when I saw Nike’s stock around 16 bucks! I think the issue people have with investing lies in so few understanding the basics of investing. What I mean by the basics are 1) knowing what investing is, and 2) understanding the different ways of investing to ultimately 3) make money.
Here is your Wake up call. We live in a time where if you’re not investing, you’ll be working past your 60’s. While some of your friends will be living off the hard earned cash they put to work in their 20’s, you’ll still be working to make ends meet. And we both know you don’t want that. I’ll explain the basics so that doesn’t happen. I won’t go in-depth on any of the topics. Why? 1) Hundreds of books have been written on each topic. 2) If I were to describe each investment in length, you would get bored and never invest. Last but not least, 3) you would never invest. So, what is investing? The official definition of investing is the act of committing your earned money or capital to an endeavor, with the expectation of obtaining more income or a profit. Here’s my definition.
Investing is your money working for you
Think of every dollar you invest as a little worker, working as hard as it can to grow. The more “workers” the better. Here are some of the ways you can put those workers to good use.
Have you ever thought about owning a company like Under Armour, Twitter, or Netflix? That’s where stocks come in. Stocks are a small portion (shares) of ownership in a company. As soon as you buy one share in a company, you are now an owner (well a shareholder to be exact). It’s great being an owner of Nike. As a shareholder of Nike, I get paid on a quarterly basis through dividends. The more shares you buy, the more workers you have doing your bidding! Buying stocks is pretty simple. Majority of people use a brokerage account. Some brokerage companies include TD Ameritrade, Fidelity, Optionshouse, and Charles Schwab.
Most brokerages have resources you can use to research companies before investing (ALWAYS DO YOUR RESEARCH ON COMPANIES BEFORE INVESTING). Another way, which is uncommon, is searching for the company on ComputerShare. The company allows you to buy shares directly from the company. However, not all companies give you this option. If you want to learn more about stocks and how they work, Investopedia will be your best friend. They walk you through all the details that go into stocks. The risk of investing in stocks is relatively moderate. The higher the risk, the higher the reward. Now, let’s look at an investment that has low risk.
Remember when you took a loan out for school or a house? Imagine loaning your money to a person or business and getting paid. That’s a bond. Companies, governments, and people ask you (the investor) to lend them a certain amount of money. They pay you interest for a certain period of time as well as the money loaned when it matures (the loan term is over). For example, let’s say the State of Illinois is planning to build a new road in your neighborhood. To pay for the highway they issue a municipal bond at (ask) $10 million at a 5% coupon rate (interest rate).
The bond matures in 10 years. If you were to lend $1,000, they would pay you interest of $50 ($1,000 * 5% = $50) at the end of 10 years. On the last year (when the bond matures) you would get your $1,000 back. Your workers made you $50 in 10 years and you did absolutely nothing! Generally, stocks are more popular than bonds because you can get a higher return. However, investing in stocks and bonds is a great way to split up (diversify) your workers. If you want to learn more about bonds, Investopedia is your friend! Surprisingly, finding information to invest in the bond market is a little trickier compared to stocks.
Real Estate is property that includes land, buildings, and natural resources such as livestock, crops and minerals. There are several ways you can invest in real estate. You can invest in real estate such as a house, land, apartment, REITs, or bonds. You want to make money one of two ways. 1) By buying real estate and selling it at a higher price (flipping) or 2) buying and holding to collect payments from tenants. Each investment within Real Estate has its own risks. Our best friend (Investopedia), goes in-depth into different types of real estate investments.
A commodity is a good that is produced and exchanged with other goods of the same type. Some examples are, gold, silver, corn, coffee, copper, cotton, etc. They can be traded one of two ways. 1) in real-time (spot) and 2) in the future (options). Normally, people do not invest in commodities and hold it for a long period of time. Why? Let’s think about it for a second. If you invested in 3 bullion’s of gold, would you want that sitting in your house? Of course not!
No one wants to wake up with 1,000 bushels of corn at your front door. Investors typically trade the contract of the commodity to make a gain on the trade. If you’re not interested in trading commodities you also have the option buy shares in a commodity fund. Generally, commodity funds are investments in companies that trade commodities or hold futures. Now you can invest in commodities without bearing the risk of actually trading them.
For the topics above, all of the information you can find is public. All you have to do is google “investing in gold” and quickly find information to invest. You’ll easily be able to find the price, news, investment opinions and the market it’s trading on. But what about private companies? Think about this idea, what if I told you there’s a way you can invest in companies like Uber before everyone else knows about them? Well it’s a bit tricky and a lot more risky to invest in companies that aren’t public, but there is a way. I present to you the start-up world!
Start-ups are companies that are in the early stages of business.
And what I mean by early I mean EARLY! Typically you hear about these companies through word of mouth or being in certain investment circles (like angel investors). When you invest in these type of companies you’re investing for two reasons and two reasons only. 1) You’re investing in the potential of the start-up making it big and 2) the person behind the company trying to make it big. There’s a chance you won’t see a profit from your investment for years. It’s a high-risk/high-reward investment. But just imagine the guy that invested in Facebook before they blew up, or Netflix when no one paid attention to it. You have the chance to be that person if you play your cards right!
It’s an exciting space to be in. If you want to learn more about start-ups and how you can get in on the action here are some places you can start: Fundable, How to invest in Start-ups and Make Money, SeedInvest
Whoo!! That was a ton of information. Just remember, the first step to gaining wealth is gaining knowledge. You need to understand the basics of where you can invest your money to make money. I just want to make sure you get this message in your head. Ready?
To Build wealth you have to invest, period…
You can make it and become wealthy, you just need to put your money to work. Nothing feels better than falling asleep and knowing I have money constantly working for me and growing! The information above just scratches the surface of information out there. If you want to learn more about investing and gain support in starting out your journey, comment below!