Getting started with investing is not easy but necessary to build up your portfolio. It is best you start at an early age to get knowledge about all the different kinds of investments and that you are aware of all the risks of these investments.
Your parents will probably teach you as first the need of investment and maybe they can give you some useful tips about the different kinds of investment. Teachers in school will give you the necessary education about the reasons of investment and how you can do it.
Getting started with investment means that you know:
– Why do you invest?
– Differences of short-term or long term investment.
– Can I afford to take any risk?
– Is the stock market something for me?
– Retirement plans and the tax benefits
There are several reasons to invest but the purpose is always to get more money. The easiest way is a savings account and everyone needs one because this account is a safe investment that gives you always some interest and you can take money from your savings account when you need and without costs.
The purpose of short term investing is mostly to save for something you want to buy in the near future, by example a car, a travel or for unexpected expenses you have. Investing for your retirement is an example of long term investment.
There are many possibilities for short term investing and your first step will probably be a savings account. When you are very young it is best you save a certain amount in this account and you will receive interest at the end of the year. The rates of interest are not so high anymore compared with many years ago but it is the first step in understanding “investing”. A savings account is a safe investment and there is no risk of losing money.
Some other possibilities are:
– Term accounts: these accounts offer you a higher interest than savings accounts but you can only get your money back after the full term otherwise you need to pay a penalty.
– Money market funds and investing in short term bonds are mutual funds offering you mostly a higher return but there are always risks. Inflation is an important one and if the long- term interest rate raise the value of your mutual funds in bonds will decrease.
Long-term investing means usually that you invest in the stock market in shares, bonds or mutual funds which invest in shares or bonds or a mix of both. The advantage of mutual funds is that you can invest according the risk you want to take. The risk of investing in shares is higher than investing in bonds. A mix of both systems is likely the best one and diversification is necessary. If you understand the proverb” don’t put all your eggs in one basket”, you will know the importance of diversification.
Retirement plans are different between all the countries and continents of the world. Many countries in Europe offer you systems to invest in pension funds which invest a little bit similar as mutual funds or you can invest it in a kind of savings account with an interest rate which is higher than the usual savings account and offering you almost every year a dividend (a part of the profit of the bank). You can receive the money when you reach the age of retirement. The second benefit of these investments is the tax benefits you can have for investing in these plans. In America IRA and 401 K plans are very popular. These plans offer also tax benefits for the employees and give them the chance to save for their retirement.
It is important you start early with investing and that you surely invest in retirement plans when you start working. It is necessary to build up a certain capital you need when you reach the age of retirement. A traditional pension will not satisfy anymore.
I recommend you also to invest the money you don’t need for at least 10 years in mutual funds or shares. These investments give you mostly a higher return than a savings account if you limit the risk. If you can’t afford to take certain risk, don’t buy shares in the stock market but choose for mutual funds which invest in a mix of different sectors or a mix of shares and bonds.
Invest only in futures or options if you have enough knowledge of the stock market and if you can afford it to take certain risks. It is not recommended for beginners but only for experienced investors.
Starting early with investing is the key to have success but don’t take too many risks!