Most people spend their entire lives investing no money. Why? Perhaps it is because they don't feel they have enough cash to invest. There's a misconception that you need thousands of dollars to become an investor, but nothing could be farther from the truth, especially today. Technology and steady evolution in the investment industry have removed many barriers to entry.
You will find out everything you need to know about
investing when you don't have any idea from where to start.
Manage Your Monthly Budget
If you have no money to invest, you'll have to start by
managing your budget. Look at everything you spend money on in a typical month;
are there one or two expenses you can eliminate?
You may not have to seriously disturb your lifestyle you're
living, but you have to weigh if it's worth putting a specific expense to gain
financial freedom in the future. Cutting out costs totaling no more than
$50–$100 per month is usually all you need to get started.
Try Cookie Jar Approach
Saving money and investing it are closely connected. To
invest money, you first have to save some up. That will take a lot less time
than you think, and you can do it in tiny steps.
If you've never been a saver, you can start by putting away
just $10 per week. That may not seem like a lot, but over a year, it comes to
over $500.
Try putting $10 into an envelope, shoebox, a small safe, or
even that legendary bank of first resort, the cookie jar. Though this may sound
silly, it's often a necessary first step. Get yourself into the habit of living
on a little bit less than you earn, and stash the savings away safely.
The electronic equivalent of the cookie jar is the online savings account;
it’s separate from your checking account. The money can be withdrawn in two
business days if you need it, but it's not linked to your debit card. When the
stash is large enough, you can take it out and move it into some actual investment
vehicles.
Stocks
The stock market is the abstract space where investors buy
and sell stocks. When you invest in stocks, you buy shares, or small
pieces of ownership, of a company.
When you invest in stocks, you profit when the company
performs well. You earn money in two ways:
Your shares increase in value. If the company's outlook is
good, other investors will pay more money for your claims than initially paid.
The company pays you a dividend. That means it
distributes part of its profit back to shareholders. Smaller companies issue
dividends less frequently than larger ones. They often need to reinvest that
money in the firm to keep growing.
Shareholders are also vulnerable to losses if things don’t
go as well as hoped. If the company loses money, your shares may lose value.
Thus, when you invest in stocks, you’re making a relatively high-risk
investment. Because the stock market can be volatile, it's best to invest in
stocks for the long term. One of the most common beginning investor mistakes is
trading based on the news. Short-term stock investors often sell at low prices
in a panic and miss out on the long-term growth that happens.
Bonds
Bonds are actually debts issued by corporations or, more
commonly, governments. When you invest in bonds, you’re lending your money
to the bond issuer.
Investing in bonds provides a reliable return because bonds
pay a fixed amount of interest at fixed intervals, often twice a year. That’s
why they’re known as fixed-income assets. Because bond issuers are legally obligated
to repay their debts, bonds are considered a safer investment than stocks.
However, bonds don’t have the exponential growth potential that stocks do.
The lowest-risk bonds are those issued by the U.S. Treasury.
Municipal bonds, which are issued by state and local governments, are slightly
riskier.
Investing in Treasurys and municipal bonds has the extra
advantage of tax breaks: You don't pay federal income tax on the interest you
earn from municipal bonds. The good you make on Treasurys isn’t taxed by
states. Investing in corporate bonds is riskier than investing in government
bonds. The safest corporate bonds are known as investment-grade bonds. The most
difficult corporate bonds are called junk bonds.
Because investors assume a high level of risk when they buy
junk bonds, they earn higher interest rates.
Mutual Funds
Mutual funds are pre-built collections of stocks, bonds, and
other types of investment assets. Typically, mutual funds are designed
and managed by financial professionals. However, some mutual funds
are index funds, which means their makeup and performance are tied to
a market index, like the S&P 500 or the Dow Jones Industrial Average.
We’ll talk more about index funds when we discuss ETFs. Investing in a mutual
fund allows individual investors to buy a diverse market segment without doing
all the footwork to research and buy individual stocks.
Unlike stocks, mutual funds aren’t traded on the stock
market. To buy and sell shares of a mutual fund, you have to go through the
investment company that manages the fund. You can only do so at the end of the
trading day. Many mutual funds require an upfront investment of anywhere from
$1,000 to $2,500, which may be steep for beginners.
Exchange-Traded Funds (ETFs)
Exchange-traded funds are similar to mutual funds in
that each is a basket of different investment assets. A live human being did not actively manage one. Instead, ETFs are
usually passively managed index funds. Many ETFs seek to replicate the overall
stock market's performance or a primary stock index. Others aim to represent a
smaller segment of the market.
For example, some ETFs are collections of companies in the
same industry or geographical locations. Or they may focus on companies with a
similar market capitalization — that is, the total dollar value of the
company’s shares available on the market.
Because someone passively managed an index fund, the fees
are usually lower than what you'd pay for a mutual fund. Unlike mutual funds,
ETFs are traded precisely like stocks throughout the day on stock exchanges.
There's no minimum investment amount beyond the price of a single share.