How I Started Investing
Investing – The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
Before I got started investing I did a bunch of research on the best ways to make my money work for me. That’s pretty much the main goal of making a financial investment, you want to see a positive output for the input you contributed. There are many ways to invest when it comes to stocks, mutual funds, ETF’s, Bonds, real estate, etc.. The list goes on. But in this post I’m going to break down investing in the stock market.
Stock – A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. For example, I have several shares of common stock from Facebook. The closing price of $114 is the price that Facebook is currently trading at per share. If you wanted to buy 3 shares of this corporation, it will cost you $342 plus $9.99 for commission. This here is called an exchange trade, you can either sell or buy with every trade and each time you make a trade the stock broker will charge you commissions. Buying individual stocks are the riskiest investment because you’re putting all of your investment in one company. If that company does bad all of your shares within that company will lose value. This is why people tend to lean towards bonds, mutual funds and ETF’s.
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. Mutual funds offer several ways to earn money. Income is earned from dividends on stocks and interest on bonds. Mutual funds are run by fund managers which sometimes tend to charge high fees and some funds don’t outperform the market.
ETF – or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. I personally like ETFs because they tend to have lower fees and they’re very diverse with several corporations, funds and different types of assets. Ever heard of the phrase don’t put all of your eggs in one basket? Well that strategy minimizes your risk when it comes to investing.
A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments raise money and finance a variety of projects and activities. Bonds are one of the safest investments you can make. Since they don’t involve as much risk they tend to not grow as fast as Stocks, ETF and mutual funds.
Personally, I invest in vanguard mutual funds within my company’s 401k plan. I only invest up to the match because 401k plans don’t have as many options to choose from. You can’t withdraw your 401k money penalty free until you’re 59 1/2. So I decided to open up a Roth IRA account with an online stock broker like TD Ameritrade. With this account I have access to thousands of stocks, mutual funds, ETFs, Bonds, Options etc… Roth IRAs have a multitude of benefits, for one, you can withdraw your contributions at any time you like penalty free because all of the money that goes in is tax free in and tax free out. If you want to learn more about the types of retirement accounts you can invest with check out my previous article: Breaking Down Retirement Accounts
Every month I contribute to my Roth IRA and I try to purchase low fee and high rated ETFs. TD Ameritrade offers 100+ commission free funds. I review these commission free funds with individual research and morningstar. Morningstar has a good rating system that tracks performance and overall projection of stocks and funds. So I analyze the ETFs and sectors I decide to invest in from these ratings. I rarely buy individual stocks, the only ones I’ve purchased so far are Facebook and Netflix. This strategy might not work for you, before you start investing I recommend that you have an emergency cushion available and do individual research. Educate yourself and do not invest in any company or fund you don’t understand. The greatest investment is investing in yourself!!!
Here are several online stock brokers that offer commission free funds: NerdWallet