10 Things You Need to Know Before You Start Investing
So, you are curious about investing, but you aren’t sure where to start? These are 10 key things you need to know before you begin.
1. Understand what you are investing in.
When you invest, you are purchasing financial assets. Here are some common examples:
- Bonds are obligations of debt, typically created by governments and corporations. By buying a bond, you hold a share of that government’s/corporation’s debt, and you are entitled to receive repayments on that debt. Bonds are typically less risky than stocks, but pay a lower return.
- Stocks are a way of owning a small part of a company. Stock owners are called shareholders, and you can make a return through the appreciation (increase) of the stock price and dividend payments made to shareholders. Purchasing individual stocks can be very risky, but the potential returns are much higher than bonds.
- Funds are managed by investment managers and are formed of stocks, bonds and other assets. Funds can either be passive or active. Passive funds track indices like the S&P 500 (the 500 largest publically traded US companies). Active funds are managed by fund managers who make adjustments to the composition of the fund over time. Funds are typically a good way to start investing because they provide higher returns than bonds but usually with less risk than picking individual stocks.
2. Investing is risky.
The most important lesson to learn is that investing is inherently risky.
Risks occur when you invest because it is difficult to value a company’s stock. Stock prices are constantly moving and so there is a good chance you could buy a stock and the next day, its stock price could fall.
Some investors may think a stock is undervalued, and so buy the stock, whilst others may think it is overvalued, and sell the stock. As investors buy and sell stocks, the prices adjust.
You can imagine the stock market like an auction: if lots of people like a stock, they will bid up the price. If no one likes the stock, the…