Investing for beginners is like learning how to swim. Not recommended: jumping in over your head in choppy waters off the coast of Maine in January to learn the butterfly stroke. Suggestion: learn to float first, getting your face wet under calm clear water.
Don’t try to learn to invest by speculating in the stock market or in the bond pits, either. Start investing in mutual funds where professionals pick the stocks and bonds for you. These funds are designed for the investing public. In my opinion, at least 95% of the investing public is best off investing here. Mutual funds simply pool money from investors and manage a portfolio of securities like stocks and bonds for the investors. You simply invest money in a lump sum, like $5000; or periodically, like $200 per month. The money you invest buys you shares in a fund.
The vast majority of funds fall into one of four categories based on what they invest in: stocks (also called equities), bonds, money market investments, and a combination of all of the above. For example, if you invest money in an equity fund, just about all of it will likely be invested in stocks.
Equity funds are the riskiest and have the greatest profit potential, with growth and perhaps some income as their primary objective. Bond funds invest in bonds to earn higher income for investors at a moderate level of risk, generally. Money market funds are the safest and pay interest rates that vary with interest rates in the economy. Balanced funds are the fourth category and invest in a balance of the other three major investment asset classes; and this makes them a great place to start investing.
Income or interest earned in a mutual fund is paid to investors in the form of dividends. Most investors simply choose to have their dividends automatically reinvested to buy additional shares in the fund in order to make their investment grow faster. What makes investing for beginners a challenge is that each general fund category has a number of varieties.
Now here’s your basic investment guide to saving money when you start investing. There are two primary costs when you invest money in funds: sales charges called LOADS, and yearly expenses. You pay a sales charge when you buy funds through a representative. For example, you write a check out for $10,000 and hand it to your financial planner who works on commission. Then, 5% comes off the top to pay for sales charges; and each year you are invested, expenses are automatically deducted from your investment. These yearly expenses can be 2% or more of the value of your investment.
Or you can buy NO-LOAD funds directly from some of the biggest and best fund companies in America and pay NO sales charges, with less than 1% a year deducted for management and other expenses. To cut costs even more go with index funds of either the stock or bond variety. Index funds simply track an index of securities, rather than trying to outperform the stock or bond market. Expenses are low because management costs are low; sometimes costing you less than ¼% a year. Plus, index funds have another advantage. You won’t beat the markets, but you shouldn’t under perform them either.
Investing for beginners need not be a game of sink or swim. Call a no-load fund company that deals directly with the public and ask for a free investor starter kit. Then start investing when you feel comfortable, and save cash when you invest money. If you have a limited financial background I suggest you find and read a complete investment guide before you invest.