Investing can feel overwhelming because of its complexity and unfamiliar language. Understanding these complexities and the language of investing is crucial because it allows you to make informed decisions about where your money is going. When managing your personal finances, it’s important to be mindful of decisions that impact your net worth. Setting clear investment goals and establishing a solid investing plan are essential steps. In this article, we introduce the basics of investing by exploring various investment instruments, offer guidance on where to start, and stress the importance of beginning your investment journey as soon as possible.
Investment Options
There are numerous investment options available, each offering unique opportunities to help grow your wealth. You hear about stocks and bonds in the financial space, but what really are these investments? And why would you choose to invest in one over the other? Learning these key investment vehicles helps you understand better where you’re putting your money and will allow you to make smarter investment choices.
- Stocks: This is where everyone’s mind goes when they first hear about the idea of investing. In simplest terms, a stock is a piece of ownership in a company or corporation that you can buy and sell in the stock market. The value of a stock is primarily dependent on the overall performance of the company you have “ownership”
- Bonds: A bond is a “loan” that you give to the government or to a corporation in exchange for interest payments over the term of the bond. Once the term of the bond expires, the issuer will repay the original price of the loan as well. These are considered safer investments than stocks since their return is often more predictable.
- A treasury bond is a debt obligation that is issued by the U.S. government. Since they are secured by the U.S. government, they are considered the safest form investments, however they typically offer a lower yield compared to other debt obligation instruments.
- A corporate bond is issued by companies and corporations for the purpose of raising money for various corporate projects. Corporate bonds typically hold more risk than treasury bonds which makes their yield higher than treasury bonds.
- Pooled Investments: When multiple investors combine their money to buy a variety of assets into a single fund that is managed by a professional. This allows for diversification and a reduction in risk, as their money is spread across stocks, bonds, or other securities
- Mutual Funds: A mutual fund is a pool of money from many different investors to invest in a wider array of securities. Mutual funds are professionally managed and can be made up of stocks, bonds, ETFs, and many other types of investments.
- ETFs (Exchange Traded Fund): An ETF is like a stock in the sense that it is traded on the stock market, however it is an investment vehicle made up of a collection of different investments rather than ownership in just one company.
- An ETF trades on an exchange like a stock and can be bought or sold anytime during market hours, while a mutual fund is bought and sold directly from the fund company and its value is based on the end of day value of all the holdings.
There are endless opportunities when it comes to investing, but these few instruments tend to be the most prevalent. Understanding these investment options allows you to make informed decisions that align with your financial objectives and investment goals. Each type possesses unique characteristics that can support your financial aspirations. Choosing among these instruments depends on your own personal financial goals, time horizon, and risk tolerance.
Where to Begin:
Now that you understand some basic forms of investments, its time to jump in and start investing right? Well, not quite. There are many factors you need to consider before you allow yourself to invest.
- Understand how much risk you are willing to take on: Determining how much risk you are willing to take on will help you better understand what investment decisions to make. Someone who is willing to risk it all in order hopes of making big gains vs someone who is trying to grow their wealth steadily over a long period of time are going to have very different approaches to investing. Before you begin investing you need to take a step back and think about the risk you are willing to take on. This allows for wiser investment choices and will not leave you as surprised by the performance of your investments.
- Calculate the Amount of Money you Want to Invest: CNBC experts believe that 15% of your pretax income is the sweet spot for the amount you should be investing annually. While this is a good rule-of-thumb, it is important to make sure you are making the right investment decisions for you personally. Setting a primary goal is a way to start when deciding the amount to invest. When beginning to invest it is okay to start off small. Maybe this is just putting a few dollars into investments and increasing this amount over time. Risk is another factor in deciding how much money you are willing to put towards investing. The amount of money you are willing to invest is completely dependent on your own personal goals and levels of comfort, and in most cases, this will look different for everyone.
- Pick an Investment Strategy: Deciding the risk you are willing to take on, the amount you are wanting to invest, and setting your goals will help you decide what strategy to take on when investing. Looking at these key factors in planning your investments will help you decide which vehicles to invest in
Why Begin Now?
Now that you have a basic understanding of investing and what needs to be done before, it is important to understand the benefits of investing and how investing now rather than in the future. The amount of money you will have available in the future and in retirement is greatly dependent on what you do with your money now. The single best thing you can do to ensure you have money in the future and to retire comfortably is to start investing early and continuing to invest often. Investing early offers numerous advantages that can significantly enhance your financial future. By starting now, you harness the power of compounding interest, where your earnings generate returns themselves, leading to exponential growth over time. This compounding effect is maximized the longer your money is invested, giving early investors a substantial edge. Moreover, starting early allows you to weather short-term market fluctuations and take calculated risks that can potentially yield higher returns. By establishing a habit of consistent investing, you not only build a larger nest egg for retirement but also cultivate financial discipline and resilience. Ultimately, the decision to invest now rather than later lays a robust foundation for long-term financial security and freedom.
About the Authors:
This article is co-written by Mac Frasier, CFP®, CEPA with Anne Neal Moore, a 2024 Oakworth Intern. Moore is a senior at The University of Alabama majoring in finance and economics.
More about the Oakworth Interns:
Oakworth’s internship program supports our core purpose: Helping People Succeed. The initiative of our internship program is to provide motivated students a thorough understanding and hands-on experience in the various functions within Oakworth Capital Bank. To learn more from our most recent group of Oakworth Interns click here.