The essence of setting aside this money to have it go to work on your behalf, thus making it possible to reap the rewards in the nearest future is investing. In the general sense, it is a vehicle that conveys you to a happier ending by putting your money into something profitable.
Imagine that you have a thousand dollars kept aside for investing, or you have a much smaller amount, say $10. In the world of investment, it really does not matter how much you invest.
It is about knowing how, when, and where to invest your money in, to enable you to minimize cost and maximize your returns considerably.
In this article, you will learn how to go about investing in a safe, knowledgeable, and stress-free manner.
The BIG Investment Question: What Kind of Investor Are You?
You have your goals and ambition for deciding to venture into investing. We all do. But to achieve these goals and perhaps surpass them, you need to go down the proper path; else you might lose everything along the way.
As with any kind of money-making venture, the first thing you should do when venturing into the world of investment is getting enough knowledge of the basics of investing.
You will have to make lots of pivotal decisions throughout your journey as an investor. A lot of these decisions will be hinged on the type of investor you choose to be. Consider your choice a sort of roadmap to the success and smooth sailing of your investment ship.
For this to happen, you need to provide a satisfactory answer to the BIG question that stares every investor in the face when they consider the possibility of becoming an investor for the first time:
What kind of investor do I want to become?
Answering this question will require that you know the different types of investor you could potentially become as well as the comprehensive knowledge of the pros and cons of each investor type.
Traditionally, there are two investor types available to everyone who wants to become an investor. Investor type 1 refers to investors who prefer to play an active role in managing their investment.
Investor type 2, on the other hand, is open to investors who simply want to bring their funds in and disappear, leaving the management of such to an investment manager for proper handling. Several factors could play a role in the type of investor you choose to become.
Your work is one of those factors. How much risk you’re willing to take is another. Your level of know-how is yet another factor. However, the investment world has really become quite dynamic as the world goes on.
Several traditional concepts have had to give way, while modern features and practices are being incorporated into the field with every passing day. While the more traditional investor type leaves you with investment options such as bonds, stocks, mutual funds, exchange-traded funds, and index funds.
Newer investor types can try their hands at some other investment options which will be examined below.
Online Brokers
Typically, brokers come in two broad categories:
- Full-service brokers.
- Discount brokers.
As the name rightly implies, full-service brokers, are brokers that offer the complete range of traditional brokerage services. This includes healthcare, retirement advice on finances— basically, everything that has to do with money.
Full-service brokers have been known to only deal with clients of higher net worth, and their charges can include a percentage of your transactions, a percentage of assets they manage on your behalf.
Sometimes they even charge a membership fee which is usually collected yearly. Quite a substantial amount if you think about it.
It is not uncommon to find full-service brokerages with accounts that have minimum sizes of $25,000. This is in no way trying to claim that the only thing full-service brokers do is take all your money for nothing.
On the contrary, traditional brokers are often justified in the exorbitant fees they charge by giving you sound advice, carefully detailed to attend to your very needs.
In times past, discount brokers used to be the ones you could only find sparingly, but today they are all over the place, while full-service brokerages are now not too easy to come by.
With the online format, discount brokers often provide tools to help you select, place, and manage your transactions, while sometimes offering a hands-off robo-advisory service as well.
With the way financial services have evolved over the years, these brokerages now also have things like educational materials on their websites, and many have mobile apps to boost their audience reach.
Also, there now exist a few them with little or nothing in the way of minimum deposit restrictions. You should take note of these things if you want to be a successful stock investor.
Robo-Advisors
The aftermath of the financial crisis that ravaged the world in 2008 brought with it a new breed of investment options. This option is usually referred to as The Robo-Advisor. Eli Broverman and Jon Stein are often credited by most, as the pioneers of the movement.
They had set out to lower the costs of investing for investors using technological inventions. Since the launch of Betterment, there have been other similar companies founded, while established brokerages have also added robo-advisor features to their services.
A recent report carried out by Charles Swab found out that up to 58% of Americans would have no problem using a form of robotic advice in their investments.
The robo-advisor option is exceptionally viable if you’re investing in the long term.
TIP! M1 Finance is an excellent robo-advising service, a great way to start investing. They offer commission-free trades on 6,000 stocks & funds, free checking accounts and charge no investment management fees. You can invest, borrow and spend your money in one account. For UK readers, we recommend Wealthsimple as the leading robo advisor.
Investing Via Your Employer
This could very helpful if you’re an employee on a rather stringent budget., If you strengthen your resolve to invest, letting go of just about 1% of your salary into an available retirement plan at your place of work can go a long way. In truth, you are not likely to even miss a contribution that little.
The thing about work-based retirement plans is this; they are less painful and more comfortable to cope with than any other investment type. This is because your contribution to the plan is deducted before tax, and you don’t get to make your contribution manually. Sometimes, you might not even be aware of its presence until you have actually to withdraw your funds. Another advantage is that you can modify your plans as you move higher up the hierarchy at work.
It’s a fantastic investment option to help safeguard your future.
What Is the Minimum Amount Needed to Open an Account?
Most stock brokering financial institutions have spelt out minimum deposit requirements. What this essentially means is that they won’t accept your application for an account until you have deposited a particular amount of money first.
As a matter of fact, certain firms will not let you open an account with an amount as low as $1,000. Also, some firms don’t ask for or require anything like minimum deposit. Some others provide quite flexible and teasing plans that include lower costs when your account balance is kept at a particular limit.
Some firms offer limited commission-free trades as rewards for opening an account with them.
TIP! Join 7 million other people and invest your spare change automatically with Acorns. You can sign up for just $1 or $3 per month. You can also earn bonus investments when you shop with 350+ top brands.
Fees and Commissions
There’s a popular saying amongst economists that goes thus: “there’s no free lunch”. Even though a significant number of stockbrokers have recently been falling over themselves to eliminate, or at least lower commissions on stock trades.
And many ETFs also offering index investing to anyone who can afford to trade with a bare-bones brokerage account; the simple truth remains that every broker out there has to one way or the other make money from their customers. Else their boat won’t be sailing for long.
More often than not, your broker will charge a certain amount as commission each time you trade stock, whether through buying or via selling. Trading fees usually start as low as $2 for each trade but can also be as expensive as $10 for other discount brokers.
While there are indeed brokers who charge nothing at all as trade commissions, they often make up for it in various ways. After all, brokerages, like any other business, are profit-making ventures, and not charities.
How often you trade in stocks can make these fees add up and come to hurt your profitability levels, so you must be somewhat careful. It’s never a wise idea to think you can hop into and out of positions too frequently, especially when your investment base is quite low. The lower amount you’re trading with, the less you want to hop around.
Trade is essentially an order made to buy or sell shares in a particular company. You could decide to buy five separate stocks at a time; you can. But note that this will be seen as five different trades and of course it is expected that you’ll be charged for each trade.
Let’s say that you have a thousand dollars to invest and you choose to buy 5 stocks from five companies. If the trading fee is $10 per trade, you’ll spend 5% of your $1,000, which is $50 on trading fees.
If you invest the full $1,000, your account will see a reduction to $950 after trading costs has been deducted. That’s 5% loss before you can even earn your first dollar.
If you then choose to sell your five stocks, you would once more bear the trading fees, which would amount to another $50. Making a round trip (including buying and selling) on all five stocks should cost you $100 flat, which is 10% of your the initial $1,000 you deposited.
If your investments do not make enough profit to cover for this, you would have lost some money simply by entering and leaving positions.
Mutual Fund Loads (Fees)
Aside from the required trading fee to buy a mutual fund, there are several other costs associated with stock brokers. Mutual funds is the phrase used to refer to pools of investor funds which are professionally managed and invested in a dedicated manner. A good example is large-cap U.S. stocks.
One of the most important fees to consider when investing in mutual funds is what is known as the management expense ratio (MER), a fee charged annually by the management team, The fee is calculated using the number of assets the investor has in the fund.
Typically, the MER fee can range from around 0.05% up to 0.7%, although it varies, depending on which type of fund is involved. But one thing that is particularly to this sort of investment is, the higher the MER, the more hold it has on the investment returns.
When you buy mutual funds, you’ll come across several sales charges, referred to as loads. Some of them will be mostly front-end loads, though you will also find back-end loads and no-loads. You need to make proper findings to ensure you don’t inherit unnecessary loads with the funds you’re buying.
As a starter, the mutual fund fees could become an advantage as compared to stock commission fees. This is because it doesn’t matter how much you invest; the fees remain the same. Thus, if you meet the requirements for opening such an account, you’re free to invest as low as $100 or even $50 monthly. It’s called Dollar Cost Averaging and is potentially a fantastic way to launch your investment journey.
Diversification and Reduction of Risks
The only free lunch in investing is diversification. When you invest in several assets, the risks of your overall performance being negatively affected by one investment’s performance is significantly reduced. In normal parlance, this could translate to mean: “Don’t put all of your eggs in one basket.”
While the biggest risk to diversification is the cost of investment (you can’t diversify $1,000 properly), it is still something you need to do if you have the wherewithal.
TIP! DiversyFund makes it easy to buy shares in a portfolio of fully vetted, multifamily real estate — a low-risk type of real estate. You can own a piece of the SEC-qualified Real Estate Investment Trust (REIT) they manage. Historic returns vary from 11% to 18%.
Mutual funds and exchange-traded funds can be quite useful in this regard, since they often come with several stock investment options in each fund, as opposed to a single stock.
Being new to a stockbroker, you should perhaps not start with a lot of money, even if you have it, especially if you want to maintain a hands-on approach to investing. You need to know that the problem doesn’t end with knowing what to invest in. It goes beyond that.
You need to find out everything you need to know and not leave anything to chance.
Every decision you will make will be relevant to the process. You need to ensure you get it right, or that your mistakes don’t prove to be too costly.
Excited to get started but you haven’t got much money? No problem, just read our article about how to start investing with little money.
Good luck as you embark on this exciting journey.
