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This investing for beginners guide will answer all questions you may have about investing, from where to invest to how to invest. We highly recommend you to check out our glossary section to familiarize yourself with the financial vocabulary.
Investing is the best way to build wealth over time. Anyone can invest as there are several investment opportunities depending on your risk tolerance and financial objectives. You only need the right knowledge to get started.
What is Investing?
Investing is defined as the act of committing capital or money to an endeavour with the intention to make more money.
Investing is not the only way to earn money but it’s one of the most effective ways to acquire wealth if you know how to invest. You must be clear about:
- How much to invest
- Where to invest
- When to invest
Investing is also largely about knowing when to take out profits. Wrong timing can be detrimental to your investment portfolio.
Why is Investing Important?
Generally speaking, there are two ways to make money (at least in today’s world). You can either make money by earning an income. Or, you can invest your hard-earned money into something that will generate more money down the road.
Each year, inflation makes your dollars less valuable. So, in essence, a dollar put in your bank account today is worth a little less tomorrow. That’s just the way it is.
Investing ensures present and future financial security. When you invest your money, your dollars are put to work to earn more dollars. Then, those dollars get reinvested to generate even more dollars. The money generated through your investments and reinvestments allows your dollars to grow over time. This is known as compound growth.
The idea is for your money to grow faster than the rate of inflation in order for you to build wealth over time.
If you invest your money wisely, you will have enough once you decide to retire so you don’t have to worry about food or bills. In fact, you can even receive a regular income stream from your investments long after you retire.
When to Invest?
Newbies and even experienced investors often worry about the right time to make an investment.
Remember that as an investor, time is always on your side. Technically speaking, a well-chosen investment will always give you returns. However, the right timing can help you get more out of the same investment.
First of all, don’t let age stop you. You are never too old and never too young to make an investment. You can, however, be too inexperienced, which is why it may be a good idea to seek professional help.
When it comes to time, the most important fact is to waste none. Bitcoin, for example, was worth $0.08 in July 2010. It was a good time to invest as the price skyrocketed 900% in just five days eventually taking parity with the US dollar in the first quarter of 2011.
Those who had invested were laughing all the way to the bank but the party didn’t end there for this magical coin. It continued to appreciate in value nearly peaking at $50,000 in 2021.
Many experts say you should make an investment whenever you get the chance to. Timing is of no importance, you should only pay attention to the future potential.
However, some insist that timing is important especially in the overall financial environment. For example, it may not be a good idea to invest in stocks if you expect the market to crash in the near future.
Similarly, it may be a good time to invest if you expect the market to increase in the near future. The key lies in benefiting from dips and having the ability to predict them in advance.
Here are some more tips to remember:
Start Off Young
The younger you start, the more time you will have to build wealth and take advantage of the power of compound interest. One of the world’s richest men, Warren Buffett, made his first investment at the age of 11 when he bought six shares of an oil service company, Cities Service, at $38 a share.
You do not have to start with a lot of money. You can start small and make bigger investments as you earn more. Also, do not let a lack of experience deter you. You will not gain any unless you start to invest.
Pay Off Debt First
It is important to get rid of your debt before you begin to invest. This is because if your debt keeps piling on then you will never be able to enjoy the perks of investing your money. Do not make the mistake of preventing ‘investment’ over ‘monthly payments’. You can, however, choose to invest the remaining amount depending on your strategy.
Have an Emergency Fund
Consider building an emergency fund before investing your money. Your emergency fund will come in handy if you ever need money. Otherwise, you’ll have to break your investment fund, which may result in a loss.
According to experts, your emergency fund should contain at least four months’ of expenses.
For example, if your expenses are $3,000 per month then your emergency fund should contain at least $12,000. Once you’ve saved this much, you can move to investing your money.
How Much to Invest?
This is the first question you should ask yourself before investing any money.
It can be very difficult to decide the amount of money to invest since there is no secret formula.
Pay attention to the following factors to understand how much you should invest:
Calculate Your Earnings
Be aware of how much money you make. It can be easy for salaried individuals to calculate monthly incomes but freelancers or business owners often find it difficult to reach a reliable figure.
In such a case, it is best to make estimates or average numbers. Knowing how much you make will help you decide how much to save and how much to invest.
Set Your Financial Goals
People invest to make more money, usually to make big purchases in the future or for retirement. They have goals (i.e: to buy a new car, move to a bigger house or retire early).
Knowing what you want or how much money you want can help you decide how much money to invest.
Technically speaking, the more money you invest, the more money you’ll make. But since money is not infinite, it’s important to set goals.
Create a Spending Plan
We emphasize the importance of saving money and only investing the money you can afford to lose.
Despite what everyone says, investments can be very risky. You can lose a large chunk of your money, hence you should never invest all that you have.
Creating a budget can help you decide how much money you can easily afford to invest.
Remember that saving and investing are not the same thing. Your savings are usually stored in a bank account for you to access whenever needed, whereas your investment is not always liquid.
We’ll talk more about this later in the guide.
As a general rule of thumb, most financial advisors recommend investing around 10% to 15% of your annual income. Whether you can invest 10% or 15% of your annual income will largely depend on how much money you make, what are your financial goals, and what is your risk tolerance.
How Much to Save and How Much to Invest?
This can be difficult to answer, but as stated previously, most experts suggest investing between 10% to 15% of your total income. However, it may vary depending on your personal and financial situation.
Let’s say you make $5,000 per month. You spend $4,000 on food, rent, etc., and are left with $1,000 to save and invest. Let’s also assume that you will be investing 12% of your annual income.
Following this formula, you should invest $600 out of the $1,000 you have left to save and invest. However, you may decide to not only invest the $600 but to add another $150 to bring your overall investment to 15% and save the remaining $250. It’s always smart to look at your personal situation and make a judgment as to how much you should invest and save.
Similarly, let’s say you spend $4,500 and have $500 remaining. Again, make a call based on your circumstances. Instead of investing $500, you may decide to invest $400 and save $100.
If you expect to spend a lot of money in the next few months then you should save more and invest less, whereas if you feel you have enough money in the savings account then you can invest more and save less.
All in all, investment and saving are both important.
Not having enough savings can cause you to break your investment portfolio, which may turn out to be very costly.
Similarly, not investing and only saving means underutilizing the money that you have and can make grow.
Your savings should always come first before you even think about investing. Your savings are the foundation that feeds your investments.
Where to Invest?
There are several options to choose from. Some of the most common choices include:
Most people think of stocks when they think of investments. They’re the go-to option. In fact, billionaires like Warren Buffett credit stocks for their fortune. Hence, it may be a good idea to turn to stocks.
Buying stocks means owning part of a company. You can buy or sell stocks and also enjoy profits if the company pays dividends. However, keep in mind that not all companies offer dividend payouts.
It is important to note that individual stocks lack diversification.
|There are various options to choose from||Returns are not guaranteed|
|Your investment is highly liquid||Stocks may volatile|
|Dividends can be huge||–|
How Will I Make Money?
You will make money in two ways:
- When the company makes a profit and pays dividends.
- When the shares appreciate in value.
You can sell shares at a higher price to make a profit or continue to enjoy dividends. However, remember that not all companies pay dividends, therefore make sure to do your research before you pick a stock to invest in.
How to Invest in Stocks?
To invest in the stock market you will have to open a brokerage account which you can do by visiting one of the financial institutions closest to you, the nearest stock exchange, or an online brokerage house. If you are an active investor or trader, there are online brokers like SoFi Invest, Robinhood, and Webull that offer zero commission trades on stocks. If you want to take more of a passive approach to your investments, then platforms like Betterment and Wealthsimple that offer “robo-advisor” services, may be a better fit for you.
Also, remember that past performance may not be a good indication of a stock’s trajectory, so always keep yourself updated on the latest stock stats.
Moreover, you can also invest through your employer by investing a percentage of your income to your retirement fund.
Real estate is one of the best asset classes to build wealth over time. Real estate prices are increasing at a rapid pace, hence it may be a good option to invest in properties.
You can choose from commercial or residential properties, depending on your goals.
While real-estate is great, it may only be suitable for long-term investment as it can take a while for properties to rise in value.
|High returns||Less liquid and more paperwork|
|A regular stream of income||Can take time to grow|
|A huge number of options to choose from||–|
How Will I Make Money?
You can make money in two ways:
- By Earning Rent: You can rent out your property and earn a regular income. This can be a good option if you’re in need of a continuous stream of money.
- By Selling The Property: The increase in value is your profit, however you may have to pay taxes as well. The good thing is that property can give you huge profits since prices can rise by 10% or even more in a single year. Thus, a property worth $50,000 can make you a profit of $5,000 in a year.
How to Invest in Real Estate?
You can invest in two ways:
- Buy Your Own Property: This can be a good option if you want full control over the selection of property. However, you will need a good amount of money to purchase your own property.
- Turn to a Real Estate Investment Trust: It can be a good option if you are low on funds. Real estate investment trusts work the same as mutual funds. You invest your money with a trust that invests it in different properties. You can start investing in REITs with platforms such as Fundrise, Realty Mogul, Rich Uncles and may others.
While it’s a great option, remember that you will have little to no control over the property and you may also not be able to withdraw money before the expiry period.
Banks and Financial Institutions
Banks still top the list when it comes to investment options. You can earn interest between 1.5% to even 2.75% percent, based on the financial organization and account type you have selected.
The concept is simple. You put your money in a savings account and the bank pays you interest (i.e. monthly, quarterly, yearly, etc.).
|No experience needed to invest||Low returns|
|Your money is safe||You may have to pay a fee if you break the fixed deposit|
How Will I Make Money?
You will earn money in the form of interest. Different banks pay different interest rates. Choose the option that pays the highest returns with the lowest restrictions.
This option can be reliable if you want guaranteed profits without any risk. However, you may not make much if you invest a very small amount.
How to Invest with Banks and Financial Institutions?
All you have to do is visit the bank of your choice and open a bank account. The agent will explain your expected returns and other conditions.
A bond is a fixed income security that serves as a loan agreement. It’s a financial instrument that gives you the right to claim back your money from the lender with additional interest.
Bonds are time bound and you may have to pay a fee if you decide to withdraw money before the expiry date.
They are among the safest options to invest money, however the returns may not always be very high.
|Guaranteed results||Long waiting period|
|Safe investment||Low liquidity|
How Will I Make Money?
Basically, a bond is a loan you give to the borrower. You will get it back with the interest, which will be your profit.
You will make money by holding bonds until maturity. The borrower will pay back the principal amount with interest. Moreover, in some rare cases you may also have the option to sell the bond at a higher price.
How to Invest in Bonds?
You can invest in bonds by working with an agent or buying directly from the issuer. Make sure to do a bit of research and only purchase bonds from a government, municipality or company that’s reliable.
Some bonds may come with very long maturity dates, up to 10 years or more.
It is a growing but highly risky investment option that’s also not legal in many parts of the world.
Cryptos are digital tokens you can use to sell and purchase items on the internet. Some of the most popular digital coins include Bitcoin and Ripple.
|You can start for as low as $1||Highly volatile|
|Easy to buy and sell||No legal status in most countries|
How Will I Make a Profit?
You will make a profit when the coin gains in value. You can then sell it through exchanges or use it to make purchases.
How to Invest in Cryptos?
Since digital coins have no physical presence, they are stored in digital wallets. Some exchanges offer paid and free wallets but in some cases, you may have to purchase a wallet from another platform like Cryptonator.
You can make money by investing in precious metals like gold and silver. Many people also opt for precious metals in their retirement account as it’s said to be a safe investment.
Precious metals remain steady even during tough financial conditions, which is why it may be a good investment option, especially if you fear the market may collapse in the future.
|High liquidity||Frauds are common|
|Stable value||Can be difficult to store|
|Easy to purchase||–|
How Will I Make Money?
You will make money when the metal rises in value. You can sell it at a higher price and enjoy the profit. However, precious metals can take a while to appreciate, hence it’s more suitable as a long-term investment.
How to Invest in Precious Metals?
You can opt to buy gold bars, invest in commodity ETFs, mutual funds, common stocks, and even futures and options. Moreover, you may even choose to go for certificates as they offer all the benefits of owning physical gold without the worry of storing it yourself.
Consider a mutual fund if you are serious about investing.
A mutual fund is a financial vehicle that consists of a number of investors who come together to invest in a number of assets including bonds, stocks, and real estate.
The mutual fund is typically handled by a third party, which may be a person or a financial organization.
The goal of a mutual fund is to maximize profit while reducing risk. Said to be more suitable for small investors, mutual funds can also benefit big investors since there are now big corporations working on mutual funds.
Mutual funds can result in losses but they are usually cancelled out by the profit.
There are several types of mutual funds including:
- Index Funds
- Fixed-Income Funds
- Equity Funds
- Balanced Funds
The manager or financial institution will charge you a fee for managing your portfolio. The fee often depends on the size of your investment.
|Less risky||You will have to pay a fee|
|Anybody can invest||You may not always make money|
|Several options to choose from||–|
How Will I Make Money?
You can make money in three ways:
- Income in the form of dividends – usually paid once a year.
- Capital gains due to an increase in the price of securities.
- Increase in the value of fund shares you have. You may sell your shares to earn a profit.
How to Invest in Mutual Funds?
The best way to start investing in mutual funds is to open an account with a fund house and create a portfolio. It’s important to work with a fund house that’s reliable as they will be largely responsible for the performance of your portfolio.
An exchange-traded fund is an investment fund traded on exchanges, just like stocks. It includes a variety of securities including bonds and stocks. It is quite similar to mutual funds. A very popular ETF is the SPDR S&P 500 ETF that tracks the S&P 500 index.
|Can be easily bought and sold||You will have to pay a fee|
|Gives you access to many stocks||Can be highly unpredictable|
|Allows you to mitigate risks||–|
How Will I Make Money?
You can earn money in the form of dividends and capital gains if you own dividend stocks. On the other hand, if you own bond stocks then you will earn money in the form of interest.
How to Invest in ETFs?
You can buy and sell ETFs through traditional dealers and online brokers.
What Makes a Good Investment?
There is no best investment option as each has its own pros and cons.
Here’s a small table to help you understand the returns offered by different options:
|Average returns between 1968 and 2019||The expected value of $100 invested for 18 years.|
|3-month Treasury bills||4.77%||$981|
|10-year government Treasury bonds||6.76%||$2,467|
From the above figures, it is evident that stocks would have given you the best returns. However, if you look into the historical annual returns of the S&P 500, you will find that it fell by more than 20% on several occasions since it’s inception.
On the other hand, gold did not fall as low and as often as the S&P 500 in the same time period, making it a safer but less profitable option than the S&P 500. Similarly, bonds and bills remained highly stable but offered the lowest returns.
These factors can help you determine the best investment option:
It is best to consider an asset that is liquid so that there is no difficulty in case you wish to exit. Real estate, for example, is profitable but not very liquid.
Most people prefer to invest in an asset that does not require a lot of initial capital. Nowadays you can invest in stocks with as little as $100, making it a good option for investors who do not have a lot of money to invest.
Consider an investment that is easy to manage. Big investors work with portfolio managers but small investors typically need to handle everything on their own. You may, however, opt for an option like mutual funds as it doesn’t require much management or expertise on your part.
Regardless of where you invest, you will more likely have to pay fees. Higher fees eat into your profits and so they have a negative impact on your returns. Always assess the value you are receiving in exchange for paying those fees.
The best investment is the one that comes with zero risk. But, unfortunately, that is not possible.
While there is no way to completely eliminate the risks, you can take steps to mitigate it.
You can choose a mix of assets to create a unique portfolio that offers safety, yet good returns. You can also reduce your risk by becoming a long term investor. Studies show that investors who hold their investments for more than 10 years are typically rewarded with higher returns.
Never put all your eggs in one basket. Diversify as much as you can. It will not only reduce your risk but also allow you to benefit from positive market changes.
The best way to diversify is to buy different asset classes, ideally from different industries and sectors that are not correlated to each other. Other than this, you may also consider investing in a single asset that offers diversification. ETFs, for example, are known for this quality.
Asset allocation involves balancing risk and reward by apportioning a portfolio’s asset mix according to the goals and risk tolerance of the investor. Since all assets have different levels of risk and return, an investor has to allocate assets carefully to ensure risks are minimized and profits are maximized.
Remember that asset allocation can change based on your ever changing goals and market conditions.
Different Investing Accounts
Investors can choose from a variety of investing accounts. Here are some of the most popular choices:
Employer Contribution/Retirement Accounts
These investment accounts are to safeguard your future (i.e: life after retirement).
Registered Retirement Savings Plan (RRSP): This Canadian account is designed to help investors save for retirement. Investors can establish this account through credit unions, financial institutions, private brokers, and insurance providers.
RRSP accounts are usually a pre-bundled group of assets or investments like mutual funds. But, you may also choose an empty account and select your own investments.
Anyone who has filed an income tax return in the country is eligible for an RRSP. You will receive your amount when you reach 71 years of age.
- Gains are tax deferred
- Your investments can be deducted from your income to reduce the tax burden
- There are several types of RRSP accounts including individual accounts, spousal accounts, locked-in accounts, self-directed accounts, and group accounts.
- Isn’t tax exempt
How much you can contribute to an RRSP varies from person to person. In most cases, you can contribute a maximum of 18% of your income.
401(k): This is an account that helps Americans save for retirement and it offers some amazing features such as tax-deferred growth, employer match, and automatic contributions from your paycheck.
- Your money grows tax free
- You can choose from a variety of assets
- Isn’t tax exempt, only tax deferred.
The current maximum contribution limit for 401(k) accounts is $16,500 for adults under 50 and $22,000 for adults over the age of 50. You can withdraw money after you turn 70.5.
Tax Sheltered Accounts
These accounts help you save money as they are tax deferred. Some options include:
Individual Retirement Accounts
Any taxpayer can fund an IRA that may be tax-deductible. There are a variety of IRAs including Roth IRAs, and non-deductible IRAs. The best option depends on your income and goals. Also, some options may offer you tax-deduction now and some may offer you tax-free income in the future.
Roth IRA is the best option since contributions to this account are made with after-tax money. Plus, unlike other IRAs, it offers investors tax-free withdrawals without penalty.
- Your savings grow tax-free
- You can withdraw your money without worries
- No need for required minimum distributions
- Low maximum contribution
Tax-Free Savings Accounts (TFSAs)
Introduced in 2008, TFSAs are saving accounts designed for Canadian citizens to save for retirement by investing in stocks, dividends, mutual funds, etc. Everything you put into your TFSA account is tax-free.
All Canadians with a valid social insurance number can open this type of account.
- The amount you withdraw will not affect your other accounts or benefits such as Old Age Security
- No withdrawal penalties
- Completely tax free
- You will have to pay 1% tax if you ever over contribute until you withdraw the excess amount
The contribution limit to this account changes year to year and currently stands at $6,000.
A brokerage account is an account that’s handled by a licensed brokerage firm that trades on the customer’s behalf. All the assets in the account belong to the customer but the company has the right to execute orders.
The gains are taxable, yet brokerage accounts are popular thanks to the availability of traditional and online brokerage firms. However, it’s important to be careful when selecting a firm since your profit will largely depend on how skilled your account manager is.
- A huge number of firms to choose from
- Suitable for investors who have no experience or time to manage accounts
- An experienced individual is taking actions on your behalf
- Brokerage houses charge a fee for their services
You can start as low as $500 but some top-notch brokerage houses require heavier investments.
Best Investment Strategy
Here are some strategies to maximize your returns.
Contribute to Your Employer’s Retirement Plan
Employer-sponsored plans can be very beneficial since they reduce your taxable income and offer tax-deferred growth. You will get free money by contributing to the account since your employer will match your contributions.
The more you contribute, the more money you will make.
Max Out Taxed Sheltered Account
This is the best way to protect your income from taxes. Contribute as much as you can to tax-sheltered accounts and move to other options once you max out.
This way you will be able to enjoy tax-free money or more growth depending on the type of your account.
Invest Long Term in What you Know
If you want to make money then get ready to invest for the next few years. Short-term investments usually do not offer good returns. But, make sure to choose an investment that you understand.
Investing Golden Rules
Check our investing golden rules infographic to find out how you can start investing the right way.
Investing for Beginners FAQs
1. Is it a good choice to invest abroad?
It depends on what you want to invest in and where. For example, it may be a good idea to buy property abroad if it’s a growing market.
2. Should I hire a fund manager?
It may be a good idea to hire a fund manager if you do not understand how the market works. The fund manager can handle your investments for a set fee. Please keep in mind that no one can offer you guaranteed results.
3. Is there an investment that is completely risk-free?
Technically speaking, there is no investment that’s 100% safe, but government-issued bonds and fixed bank deposits are considered to be one of the safest asset classes. However, they have their own drawbacks as well.
4. What is online trading and can it help me make money?
Online trading allows you to earn money by projecting the direction of an asset in the future. Traders use technical analysis to predict the direction of an asset.
While you can make serious money trading, it is highly risky.
5. Is it a good option to reinvest my profit?
The more money you invest, the more money you’ll make. Some online brokerages offer to auto-invest your profit so you can continue to make money.
6. Will I have to pay taxes on investments?
Yes, sooner or later you will need to pay taxes on your investments. The rules largely depend on the type of investment you have.
7. Are there fees involved other than the actual investment and taxes?
Yes, you may have to pay management fees and commissions if you work with an agent or brokerage to invest in the stock market. Similarly, if you invest in real estate, you may have to pay fees to your lawyer if you buy and sell property.
The sooner you start investing, the faster you will be able to build wealth over time. Find the right investment plan and work on your financial goals.
Start small and increase your investments once you build confidence. All the best!
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Ricardo is an entrepreneur, investor and personal finance nerd who enjoys spending time with his family and friends, travelling and helping others achieve their financial goals. Ricardo has been quoted as a personal finance expert in several online publications including Healthline, Bankrate, GOBankingRates, MSN Money, Yahoo Finance, U.S. News & World Report, Forbes and USA Today.