In 2020, the stock market capitalization reached $95 trillion (USD) amid coronavirus. The stock market made millions of millionaires and billionaires, and one of the world’s wealthiest people Warren Buffet, is not rich because he invented something but because he is a great investor to the date.
Did you ever wonder how investing works? How you can generate income while you are sleeping? How can you become one of the wealthiest people? What are the multiple ways to generate income? How much risk does it take to invest your money in the stock market? What are the different investments are there? And much more.
As you read further, you will be triggered with more such questions, which is why we made sure to make this a mini investment guide for you. (Consider doing your own research before investing your money)
What is Investment?
It is one of the most confusing terms among people because whenever the word investment comes up, people think about the stock market, investing in stocks, and spending money.
However, investment is more than investing money. It might be anything if you are taking care of your health, then it is investing in your health, and if you are studying, it is investing in your education. Investing cannot only happen through money but also through time.
Investment says that you give something (time, money, or effort) to multiply it as time goes by. If there is anything that can grow with strong efforts as time goes by, it is money alone.
How Does Money Grow?
There are many ways people travel to multiply their money. However, the stock market has always been a lucrative way for most people to become wealthy.
Before digging deep into the subject, there are a few keywords you need to understand. They are passive income followed by active income.
If you have been studying the stock market lately, you should have come across this term. Did you ever wonder why do people talk about passive income? Passive or residual income is the money you get 24/7 without putting more effort into it. People represent this type of income as easy money because, with little effort, you get paid more.
The stock market comes under the passive income genre because it makes you money even when you are sleeping. Besides, people ask you to invest the residual amount you get to stay on the safe side.
Active income is unlike passive income. This is your hard-earned money where you get paid daily, weakly, or monthly from your day or corporate jobs.
Things You Need to Consider Before Investing:
The stock market seems a fun thing to do. You see how people are becoming rich by only investing a little money. This draws you towards it. However, there are certain things that you need to be very particular about before investing in stocks.
1. Know Your Household Budget:
The first step in your investing journey is, understanding your money behavior. You need to figure out your monthly expenses to track where your money is going. Take a pen and a piece of paper and jot down your monthly income with the total household expenses such as the power bill, groceries, water bill, etc.
It will help you understand your savings better for better investments. Also, try to cut down your expenses on unnecessary things as much as you can, this way, you will be left with more money to invest.
2. Do Not Have Any Debts:
If you have any debts, stay away from the stock market. The stock market fluctuates, and its progress is not a constant state every time. There will be months when your stocks will be performing below the line, and it will take at least a month to recover back into a positive state.
While your stock investments are underperforming, your debt interest payments increase, leaving you with no choice but to apply for a new loan.
3. Maintain a Cash Emergency Fund:
This should be given the same importance given to points 1 and 2. An emergency fund will carry your expenses for more than 3 or 6 months. So that you can use this amount in uncertain times like inflation, which means you should have saved up a lot before entering into a rollercoaster ride. The emergency fund can be saved in your savings account.
4. Know What Your Bigger Goals are:
There is no point in investing your money without any goal. The bigger goals can be the goals of money or your dream of doing something with the money you are saving up. Figuring out your goals can motivate you in the long run of your investment journey. Make sure that your goals are long-term goals.
5. Getting Advice
If you do not know what to do, get help from the experts in the field. You have to do it, especially when dealing with the money. If you want to invest in stocks but do not know how to get started, then consult a financial advisor who can help you from scratch by identifying your financial goals.
Of course, he will charge you a little, and it is totally worth every penny you pay. You cannot prefer a few bucks over a million dollars, right?
Tips for Beginners: (The Best Investment Advice)
- Start investing small: even $100 can help you.
- Learn at least 50% about stocks before investing: after all, it is the hard-earned money you are putting in.
- Only invest money in stocks if you have long-term goals: it is better if your goals are 5-10 years away from now.
- Do your own research before picking up any stock: a proper exploration will help you understand the particular stock better.
- Learn, learn, and learn: this is not a game you are playing to simply put your money somewhere and expect it to grow. Consistent learning is the only way to grow without losing money.
Different Types of Investments: How Investing Works?
There are multiple ways you can opt to invest your money. They are
- Real estate
- Cryptocurrency, etc., there are a few others, but these are the most common investments people make around the world.
While there are 10+ different stocks, the most popular stocks are
- Mutual funds
- Individual stocks
- Large-cap, Mid-cap, and small-cap stocks
- Domestic and International stocks
- IPO stocks
- Dividend and non-dividend stocks
Stocks have become a lucrative way for people to make passive income and become rich. However, a lot is going on behind. Intelligent investors do not simply put their money out but also learn the market demand for a diversified portfolio. If you are a beginner, talk to financial advisors or consult an investment advisor to start investing.
- Mutual Funds or Index Funds
Most people starting out as investors prefer mutual funds as their primary investment strategy. One of the best benefits of a mutual fund is that it teaches and gives you time to learn everything you need to study about the investing basics.
What precisely is a mutual fund?
You might have heard the great investors saying, “do not put all your eggs in one basket”. This famous quote explains everything. Just as the name indicates, a mutual fund is a collection of stocks from different companies put together for people who are with low-risk tolerance.
You need to create an investment account on any one of the investing platforms, which is also known as online brokers, and start investing by picking the best mutual fund. Once you have added the amount to your investment account, your mutual funds are maintained by a mediator, and they charge a few bucks since they diversify your money into different companies on your behalf and bring you profits.
At the end of the day, only the actively managed mutual funds can see great returns, even though it is diversified.
2. Individual Stocks
Individual stocks are more risk tolerance investments. Here, rather than investing in mutual funds, you invest directly in the company itself. Investing in individual stocks means that you are buying a part of the ownership of that company.
You will bear the responsibility for your profits and losses. If the company’s capital gains profits, your stock value increases, and vice versa. These kinds of investments will always give you the best and the highest returns than any other investment, but choosing the right individual stock and maintaining it, is the hardest thing you could ever do.
If you want to invest in high-risk investments like personal stocks, you need to open a brokerage account or a securities account, and you will be charged a little for the brokerage services.
A brokerage account is just like a regular bank account, except for the fact, that it is an investment account. It is used to buy the securities such as stocks, bonds, EFTs (electronic fund transfer systems), and mutual funds.
3. Large-cap, Mid-cap, and Small-cap Stocks
These are not the actual stocks. Instead, they tell you the value of the stocks based on the company. The gigantic companies worth billions and trillions of dollars comes under the large-cap stocks. While others come under the mid-cap or small-cap stocks.
Companies with a market capitalization of $10 billion (USD) or above come under this category. The gigantic brands are
- Amazon, etc., each one of these brands is worth trillions of dollars.
People investing in these brands may not suffer a huge loss, but it might be hard to see the increment in the stock value because they are already ruling the world.
Companies with a market capitalization of $2 to $10 billion (USD) are considered mid-cap stocks. The brands are
- American Eagle Outfitters
- First solar
- Dunkin’ Brands Group, etc.
People are advised to invest in one of the companies ranking on the mid-cap list. Because these companies have the potential to reach large-cap companies. If they have managed to come this far, extending to the large-cap is not a thing, right?
Companies with a market capitalization of below $1 billion are small-cap stocks. These are probably start-ups, and most people do not tend to invest in one of these companies because they are still start-ups or didn’t show any improvement if it has been there for a while.
The small-cap companies are:
- Talos Energy, Inc.
- Canadian Solar, Inc.
- Thyrocare Technologies Ltd, etc.
Investing in one of these stocks requires courage, a good knowledge of assessing a stock, and other investing skills.
4. Domestic and International Stocks:
These are also not the actual stocks but the types of stocks. Domestic stocks are the stocks of American companies traded on various platforms in the US. Stocks that operate out of Europe or Asia are the general domestic stocks.
For instance, if you live in Europe and trade stocks in the American stock market, then it is general domestic stocks while living in the US and investing in the US stock market is domestic stocks.
International stocks are the stocks that are operated out of your country’s stock exchange programs. For instance, if you live in the US and invest in the Indian stock market, it is known as international stocks.
5. IPO Stocks:
IPO is Initial Public Offering. It is called an IPO stock when companies go public for the first time with a persuading business concept to raise money for expanding their business. Investing in the IPOs can be appealing. However, scaling a business through its past performance can benefit you while picking up stocks.
6. Dividend and Non-Dividend Stocks:
Companies that pay you regularly are dividend payments or stocks and vice-versa. It was not a norm before to reward the stockholders. However, now, to make their investors happy, companies pay dividends.
If you are looking for fixed-income investments, then bonds are the best way. To raise the heavy capital, instead of taking loans from the banks, companies reach out to the investors who are willing to buy their bonds. They pay you annual interest for your money, as per the agreements you have gone through while picking the bonds.
Stocks and bonds are two different types of investments. Buying a stock means you are purchasing the ownership of the company. Whereas buying a bond means you are lending out your money to the companies, you are not buying the ownership.
Bonds can provide you with a fixed income, but this doesn’t mean that the bond market is always constant. If the stock value increases, the bond price decreases. Because you might have agreed to the lesser interest payment.
And with the declining markets, the bond value increases because to increase the capital, companies attract the investors with high-interest rates, and in these cases, you would suffer from fewer interest rates.
A vast population opened gates for real estate businesses. If there is anything after the stock market, it is real estate. Real estate investments have sored up by 10x times more than it was a few years ago.
There are the four major types of real estate
- Residential real estate
- Commercial real estate
- Industrial real estate
In the residential real estate, the buildings you live in, such as apartments, villas, penthouses, townships, etc., come under the residential real estate. So, investing in the residential business can get you a fixed income every single month. (excluding the maintenance)
Buildings that generate income, such as shopping centers, hospitals, schools, etc., come under the commercial business. Investing in commercial buildings can generate more money than any others.
Typically, enormous constructions like depository and factories come under the industrial real estate. If you have a large piece of land and can expense the fabrication, you can be the next millionaire.
Properties are also considered an investment since the property value increases over time. Investing in properties is popular in the states of India, especially in the southern sides.
However, if you do not want to invest directly in real estate, you can buy the shares from the real estate investment trusts (REITs), which will invest your money in various ways and give you the highest returns than the stocks in the stock markets.
This is one of the best benefits available out there in the US. People planning for their retirement starts putting money aside from their income to sustain their retirement period. Saving up for your retirement requires retirement accounts, which are totally different from other bank accounts.
Cryptocurrency is digital money, and it’s one of the booming industries in recent years. However, investing in crypto is not advisable if you do not know how crypto works. If you want to invest in crypto, watch this to learn.
Learn Investing Basics to Advanced:
Investment is not any rocket science to learn. You can ace the investment industry if you follow the correct references and the right people.
Here are some of the free ways you can follow to become the best investor
Books are one of the best sources to learn about the investment industry. No other means of learning can provide you with all the necessary things together in one place.
The best investment books are:
- The Intelligent Investor by Benjamin Graham
This book is authored back in the year 1949. The size of the book may overwhelm you, but the principles discussed in this book are still functional to date. The Intelligent Investor clearly states and explains everything about the investment with an example. It is recommended by the intelligent investor Warren Buffet itself.
2. Rich Dad Poor Dad by Sharon Lechter and Robert Kiyosaki
Rich Dad Poor Dad helps you understand how money works and creates a money mindset in your body. And it acts as a guide of inspiration and motivation for those creating wealth from wealth. This book is particularly recommended for beginners.
3. The psychology of money by Morgan Housel
The psychology of money is a must-read book for it teaches you everything about money- how money works, the economy, how to control your emotions, etc., this guides your emotions and thinking abilities to make better decisions while managing the money.
YouTube Channels to Follow:
The Internet did not only make our lives easier but also dug a new path for our learning culture. The new learning path is paved in such a way that we can learn from any corner. YouTube is one such platform, where most premium content is available for free.
Here are a few Youtube creators you can follow:
Each of the above youtube channels clearly talks about the investments. If you follow them, you can get through it.
The whole world is running based on investment. As the population increases, the demand for goods is increasing as well, which is actually good. Because it is not only bringing the bad but also the endless opportunities to grow as you like. There are a lot of ways available for a person to invest money and time.
Irrespective of age and place, there are nearly 10,000 ways available for a person to become wealthy. Similarly, there are more than 10,000 ways available for a person to waste money.
However, your hard-earned money can be multiplied as well, and there are chances that you might even become 1% in the world of wealthy people only if money is invested in the way it should be.
For better investing, you first need to understand how money works.
1. Can investing make you rich?
Yes, investing can make you rich only if you manage the investments properly.
2. When should you start investing?
It is better to start investing as soon as you can. The sooner you start, the more returns you get in the future.
3. Why is investing better than savings?
Savings do not get you anything. They are only kept safe in the bank accounts. Whereas, in investing, your money makes money for you, which is doubled over a while.
4. When investing in a company, what to look at?
There are many factors you need to care about, namely:
- P/E ratio
- Charts, etc., are some of the most crucial things to care for.