I remember when I first got started in the investment business. Even investment basics felt like a foreign language. I took several economics classes in college, so I sort of understood the markets but my undergraduate degree was in Sociology, and my Master’s was in Education – a pretty far cry from a degree in business, finance, or accounting. Besides that, investing was never discussed in my household growing up.

On-the-job training

My first job in the industry was actually a temp job. It was more administrative in nature. However, it quickly became a new and unexpected career path for me. I remember feeling embarrassed at first that I didn’t have a clue about what people were talking about. I was working as an administrative assistant in the equity research department of a regional investment bank. I helped with compliance records and editing. The first time I read the stock reports that the analysts wrote, it felt like I was reading gibberish! I’m sharing my experience with you because if you are a new investor, I want you to know that I’ve been there. You’re not alone.

Fast forward twelve years. I spent most of my career in equity research. I even become a publishing analyst and can actually remember dodging calls from Bloomberg at one point. (I was always afraid to talk to the media because I didn’t want to say something stupid by accident). I took numerous classes in business and accounting over the years. Now, I enjoy sharing those investment basics and helping my clients make the best decisions for their portfolios.

Investing doesn’t have to be complicated, but it does take a little research and education to get started.

Where to start

The first thing to know about investing is that it is critical to have a strong financial foundation before you get started. That means establishing an emergency savings account and paying off debt. If you’re having trouble prioritizing your financial goals, consider discussing them with a financial advisor.

investment basics

Why invest?

Once you have a strong financial foundation, you’re ready to start investing.

Why take the risk and invest your hard-earned money? This is an important question. After many investors’ experiences from 2007-2009, there is still a lot of fear around investing in the stock market and rightfully so.

Let’s face it, though. You work hard for your money. Don’t you want your money to work hard for you? Investing is a way to grow your savings while also combatting inflation.

Inflation Risk

Investing is key to keeping up with inflation. Inflation is the rate at which prices increase. Do you remember the price of gasoline when you first started buying it? When I first started driving, it was less than $1.00/gallon. In my adult life, I have seen some huge swings in the price of gas, but the point is that it has increased substantially since I first started driving. Much of the growth in that price is due to inflation.

When I am working with individuals who are retiring or are retired, I often hear that they don’t want to invest their money anymore because they don’t want the market risk. What some fail to realize is that by not investing in the market, they are exposing themselves to inflation risk, meaning that over time their money will not buy as much as it will today due to rising prices.

How do I start investing?

Start with your “why.” Take the time to clarify what you want to achieve. Do you want to pay for your child’s college education? If that’s important to you, it will keep you focused and help you stay on track during rough markets. Or ask yourself the question: What do you dream of doing once you no longer need to work?

Once you have a clear list of your financial goals, consider how long you’ll be investing (known as your time horizon), your comfort with declines in the market (your risk tolerance), and if you may need to access the funds (your liquidity needs). These are the three primary factors that financial advisors consider when making investment recommendations. Additional factors include your investment experience, other investments, and the availability of liquid assets.

What is a stock?

A stock is a share of ownership in a specific company. The amount that you own in a company also represents your share of the profits generated by the company. Of course, that also means that your share of any loss will be similarly proportionate to your percentage of ownership. If you buy a stock, you can make money in a couple of different ways. The company’s board of directors may distribute a portion of the company’s profits to its shareholders as dividends. In addition, if the value of the stock rises, you may be able to sell your stock for more than you paid for it. Of course, if you sell a stock when the price is down, you’ll lose money.

investment basics

3 Reasons to Invest in Stocks

When you’re considering investment basics, it’s important to look at the reasons for choosing stocks.

Potential for Higher Returns

While we don’t have a crystal ball to see into the future, stocks have historically outperformed cash and/or bonds on a long-term basis. However, one of the most important investment basics is the knowledge that with greater returns comes with greater risk. Stocks have historically had greater volatility in pricing and there is the potential to lose part or all of the money you invest in a stock. Due to the volatility, stocks are generally not appropriate for the money you are counting on in the short term.

Consult with a financial advisor to see if stocks are an appropriate fit for your portfolio. You want to make sure that you have the financial and emotional ability to withstand the ups and downs of the market.

So Many Options

There are many options when it comes to constructing a stock portfolio. There are different types of stock as well as many different ways to diversify your overall portfolio. For example, you can diversify your portfolio by industry, by location, and by growth prospects.

The growth stock category is characterized by corporate earnings that are increasing at a faster rate than their industry average or the overall market. Income stocks typically offer higher dividend yields than market averages. Value stocks are characterized by selling at a low price relative to the sales and profits the company is generating.

These are just a few of the ways stocks can be categorized. Your financial professional can help you decide which would fit best in your portfolio as well as how to get started investing in stocks. One key thing to remember when investing in stocks is to diversify your holdings. That way, if one company is having trouble, it won’t have such a negative impact on your whole portfolio.

Liquidity

While stocks are generally used for long-term investment strategies, they do have the benefit of being more liquid than some other investments. Stocks that are widely traded can be sold any day that the market is open. Keep in mind that not all stocks are widely traded so you’ll want to discuss this with your financial advisor. It’s pretty easy to set up ACH on most investment accounts so that you can have the funds deposited right into your bank account, often in less than a week.

Most people who have retirement accounts are invested in ETFs and/or mutual funds even if they don’t realize it. The reason that so many retirement accounts hold these investments is due to the benefits of these types of investments. For one thing, you can make small initial and ongoing investments which may not be available in other types of investments. Investing in ETFs and/or mutual funds enables you to pool your money with other investors. The portfolio manager will then direct the investment strategy for those funds. Individual investments are determined based on the investment strategy for the specific fund.

3 Key Benefits of Mutual Funds

  • Diversification – Through mutual funds, you can have ownership in hundreds of securities by making just one investment.
  • Expert Management – As I mentioned, a portfolio manager is responsible for adhering to the investment strategy of a particular fund. You don’t only get their expertise, though, you benefit from all of the analysts on their team.
  • Liquidity – Mutual funds are bought and sold on the open market on any trading day.

What are ETFs?

Exchange traded funds (ETFs) generally invest in a group of securities that are found in a specific index. ETFs typically have lower internal fees than mutual funds because they do not have the active management that a mutual fund has. They are designed to mirror index returns, not to outperform. While fees are generally lower, they can end up being higher than mutual funds if you buy and sell frequently due to trading costs and any relevant commissions.

Investment Basics: More Information

If you still aren’t completely clear on which investments are right for you, check out the next in our series on investment basics, Types of Investments (coming soon!). Want more information about how Great Lakes Investment Management can help you? Contact us for a consultation today.

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