Investing can be daunting for newcomers who are unfamiliar with financial terms or who rely upon the bad advice or experiences of other novice investors. If you want to grow your hard-earned money through investing but are unsure how and where to begin, here are the answers to 10 frequently asked questions that can help you feel more comfortable about investing for the first time:
1. Why Should You Invest in Stocks?
Stocks offer you the opportunity to grow your money over time by buying into companies. You benefit from larger returns than if you put all your money in a bank savings accounts or let it collect without any interest underneath a mattress. Investing can provide income beyond your monthly paycheck in the form of dividends.
2. What Stocks Should I Choose?
The stocks that you choose for your investment portfolio depends on your needs. If you are looking for a safer investment, you could choose blue-chip stocks. If you are looking for bigger, faster growth and are comfortable with taking on risk, you could invest in newer tech companies. (For related reading, see: A Primer on Investing in the Tech Industry.)
Investing in stocks is not just about watching stock prices go up and down. It's also learning about the companies you want to invest in and then looking at their earnings history, projections, stock prices over time and ratings. Investing in individual stocks is one option - another is to invest in several stocks at once through index funds, mutual funds or exchange-traded funds (ETFs).
3. Why Should I Invest in a Fund Instead of Just a Few Stocks?
When you invest all your money into just one stock or even just two to three stocks, you increase your risk significantly because your entire portfolio is tied to one or just a handful of companies. Their fortune becomes yours. If their stocks go down in value significantly, you could lose a lot of money.
If you invest in a fund or ETF, you could own hundreds of stocks as well as bonds, creating diversification and lowering your risk.
4. Why Do People Invest in Both Stocks and Bonds?
Investors own both stocks and bonds to diversify their portfolio and thus lower their risks. Bonds are typically considered safer. They are basically loans you are giving to reputable institutions, such as the government or well established companies, that you trust can pay you back with interest over time. Stocks, on the other hand, are investments in public companies whose value can go up and down.
5. Why Do Stock Prices Fluctuate So Much and If the Market Changes a Lot Should I Sell Everything?
Stock prices go up and down on a daily basis. This is normal daily volatility and is influenced by a lot of factors ranging from supply costs (oil, transportation and materials) to internal management, elections, trade negotiations, government regulations and economic events. The stock market typically has recovered and gone up over time. Diversified portfolios are meant to grow over a longer period of time.
Avoid emotional decision-making and keep your long-term goals in perspective. Gauge the performance of a stock by looking at benchmarks. If you see a noticeable drop, such as 5%-10% below the benchmark, take a look at the company’s performance overall and figure out how much of that stock you wish to retain in your portfolio. Before making any decision, pay attention and learn what brought about the change in the stock value and its performance over time. (For more, see: Investing 101: Types of Investments.)
6. How Long Should I Keep Stocks and Bonds?
Investing in stocks and bonds in general should be done with funds that you do not need immediate access to. Being forced to sell your investments because you need the cash for your immediate expenses will cut you off from the benefits of longer-term growth. You can buy or sell stocks and bonds at any time.
Far too often investors focus only on short-term rewards. A 2015 TIAA-CREF survey revealed that over 50% of investors were focused entirely on short-term performance alone. Investors usually hold on to the bonds until maturity where the initial amount loaned out is due in entirety so that they can receive the full benefits.
7. How Many Bull and Bear Markets Have There Been?
The market has cycled between nine bull markets (when market goes up 20% or more) and eight bear markets (when the market goes down 20% or more) since 1926, according to First Trust Portfolios. Each bear market lasted 1.3 years and had a loss of 41% on average, while each bull market lasted 8.5 years and had a gain of 458%.
8. What Other Investments Should I Have?
You may want to have other short-term savings such as money market accounts and certificates of deposit (CDs) to earn a higher rate than your savings account at your local bank. CDs, however, will tie up your money for a period of time. You could also consider investments such as real estate and commodities.
9. How Do I Invest in a Private Company?
Investing in private companies involves more risk. Previously, you had to have a net worth of $1 million or more to be an accredited investor and be eligible to invest in a private company, according to the U.S. Securities and Exchange Commission (SEC). Rule changes however offer more flexibility.
Individuals with a net worth of $100,000 can invest up to 10% of annual income, while those with less than $100,000 can invest up to $2,000 or up to 5% of their annual income, whichever is the lesser of the two.
10. How Many Types of Investment Accounts Should I Have?
This is an individual decision. Options include regular spending (checking and savings account), emergency fund savings account, investment accounts for mid-range goals, college fund accounts for your kids, 401(k) and IRA plans as well as a brokerage account.
When it comes to investing, knowing where to start can be overwhelming. Start with understanding the basics before figuring out what investments are appropriate for you. (For more from this author, see: 20 Financial Facts You Should Know by Age 35.)