Investing 101

The tools for taking control of your financial future are more accessible than ever. Learn how to get started!  

You’ve heard the advice from parents, friends, co-workers…or maybe a casual acquaintance: “You better put money aside. College is expensive. Retirement will be here before you know it. You should get started now and learn how to invest.”

But where to start?

The stock market looks complicated. Bonds sound even more confusing than stocks. The bank is paying very little interest on my savings account.

Millions of Americans are discovering that investing in stocks and related securities, as opposed to leaving money in the bank, is more straightforward than many people think! It’s actually easier than ever with so many online platforms, some provided by brokerages. You don’t have to be a professional to be successful. You don’t need a degree. You do need knowledge – the willingness to study some fundamental principles and guidelines – plus patience, a dash of self-discipline, and of course, the willingness to defer gratification by putting aside savings on a regular basis.

Fortunately, one of the most valuable investing tools is readily available and free for the taking: Time – the weeks, months and years that are needed to grow modest financial assets into substantial nest eggs. The younger you are, the more time you have. Conversely, the more you delay…

The Power of Compounding

You may have heard of “the power of compounding” or the “power of compound interest.” This phrase, to savers and investors, connotes how a sum of money will grow exponentially over time by the repeated reinvestment of distributions like interest earnings, capital returns, and dividends to the original sum. Each round of reinvested earnings adds to the principal amount you have which yields the next round of earnings.

Let’s say, for example, you invest $1,000 in a stock mutual fund (a number of stocks bundled together) or other investment that pays an average 7% return. After a year, the fund should be worth $1,070 – the original $1,000 plus $70 from capital return, dividends or both. After the second year, the account will have grown to $1,144.90 – in other words, $1,070 from the first year + the second year’s interest ($1,070 X 7% = $74.90).

Additionally, let’s say our investor after year one keeps investing an additional $1,000 a year for the next 20 years. Assuming the same 7% annual return, the accumulated assets in the stock mutual fund will grow to $40,995.49! This means that from $20,000 ($1,000 a year for twenty years) of contributed savings, the value of the investment will have more than doubled.

Available Investment Choices

Once a novice investor understands the power of time and compounding, the next step is to learn about the different investment choices that are available. The field is vast. Stocks are the most basic – they are “shares” or pieces of a company that are bought and sold in public markets at prices that are constantly changing. Imagine the ABC Company, divided into 100,000,000 shares owned by investors around the world – these are the “owners” of the publicly traded ABC Company.

Naturally, investors are continuously searching for stocks that produce superior returns, which will help them to reach their financial goals more quickly. A stock fund or security that averages 9% a year return will produce $51,160.12 to the $20,000 investor referenced above; while a fund or security that averages 6% a year produces $36,785.59.

Some stocks prove to be riskier than others, which can mean they yield superior returns, no return at all or possibly a loss of the original investment. So-called “safe” stocks or other investments typically produce smaller-than-average returns year in and year out – making them preferable for risk-averse investors. How does a savvy investor know the difference? Study, knowledge, inquiry, experience. Luck often plays a role as well.

Markets go up and down, though the long-term trend is decidedly upward. Because this is the case, the successful investor quickly learns not to rush into markets that look favorable or rush out when prices are falling. Impulsive buying or selling usually results in disappointment.

On the way to building a solid financial portfolio, keeping an eye on costs is key. Hiring a money manager or financial adviser may prove to be a wise move. At the same time, funds spent on management and advice, rather than invested, may represent a significant opportunity cost and a reduction of overall return.

The public library is usually an excellent place to check out books on elementary investing. Websites such as Investopedia and BetterInvesting, the investment education arm of the National Association of Investors, provide a wealth of instructional and explanatory material with definitions of unfamiliar terms in language that is easy to understand. Another source to consider is the local offices of stock brokerages. In addition, investment clubs can be an excellent chance to meet and learn from experienced fellow investors in a social setting.

The tools for taking control of your financial future are more accessible than ever. The process can be immensely satisfying – not just rewarding.