Investing Tips for the Novice

Natalia Jones By Natalia Jones, 1st Jul 2014 | Follow this author | RSS Feed | Short URL http://nut.bz/22m_25v8/
Posted in Wikinut>Money>Investing

Firstly, we must make the distinction between saving and investing unmistakably clear. Storing money in a tin that is hidden at the back of the kitchen cupboard classifies as saving, as does placing money in an average savings account at a solid bank in return for little or no interest. The term investing' implies that there is some degree of risk involved, for which the investor is rewarded with a commensurate rate of return or interest.

Why Take On Risk At All?

You may wonder why the need to undertake any risk at all arises. The answer to that sits at the core of why all investing takes place. It is called inflation. If the money that we earned today was guaranteed to have the same purchasing power in ten years or even at the end of one year, we could all forget about placing our hard earned moolah in the bank and instead bury it in the back yard. The fact is that inflation exists and it will not cease to exist, and so we must either work harder and longer until we expire or learn to make our money work as hard (if not harder than) we do.

The trick to investing for beginners is to get familiar with a few alternative investment vehicles. As soon as you have mastered these, research a few more and try allocating some funds in their direction. Soon enough you will have a diversified portfolio of investments all working to get you to your goal of beating inflation.

Three different investment types are discussed below to jumpstart your strategy.

Bonds

Corporations and even governments sometimes need to borrow money to fund their planned expenditure. Instead of going to a bank for a traditional loan, they can opt to ask the public (you) to loan them the money, with a promise to pay back your principal plus an agreed rate of interest. Just like lending money to a friend, there is no guarantee that the loan will be repaid, but there are special credit rating agencies that assess the risk attached to lending money to these companies or governments so you can make informed assessments of the risk factor. In keeping with the basic tenant of investing, the rate of return will match the risk attached.

Exchange Traded Fund (ETF).

You're probably wondering how things got so complicated so fast just by reading the name of this investment vehicle, but not to worry, this is not as complex as it sounds. You have probably heard of the Dow Jones Industrial Average or the S&P 500. An ETF can be thought of as a pool of funds that is invested in all of the stocks that comprise a particular index. In essence, if the Dow made a return of 10% the DIA (which is the symbol for the ETF that mimics the Dow) will also make 10% as it is invested in the same companies. By buying in to an ETF you get the benefit of using a relatively small amount of cash to invest in a wide range of stocks. Of course, the ETF can also experience negative growth (which is financial parlance for decreased value) so you probably should not throw your rent money into one.

Common Stock

This is the most popular and least understood of all basic financial vehicles. Buying the stock of a traded company makes you part owner of that company. For this privilege, you are rewarded with dividend payments relative to the number of shares you own. Your money also grows through capital appreciation. This occurs when the price of the share rises above the amount you originally bought it for. There are different strategies to investing in common stock. Some like to go in for the long haul, holding the stock for several years until the value appreciates to some desired level, meanwhile also reinvesting dividend payments. Others prefer to buy and sell to capitalize on short term peaks in price movements. For the beginner, it is best to purchase stock with the same mindset as choosing a life partner. Assess if you have the same values (do you like their business?). Look out for room for growth and ensure that it is not a fad or infatuation.

Ready to Invest?

Now that you are more informed on a few new investment vehicles you can start channeling some of your savings into these avenues. Be sure that you do not make the mistake of trying to invest with too much debt though. For instance, if you are saddled with credit card debt, the interest on your debt will outweigh any return you could make in the short term. Therefore it is best to get rid of high interest debt before you start investing.

Photo Credit: Master isolated images/freedigitalphotos.net

Tags

Beginners Guide, Finance Tips, Investing, Investment Strategy, Investment Tips

Meet the author

author avatar Natalia Jones
Natalia Jones is a full time freelance writer and blogger. She holds a Post Graduate Diploma in Financial Management (ACCA). She writes on personal finance, business and much more.

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Comments

author avatar Sivaramakrishnan A
2nd Jul 2014 (#)

Good post, Natalia. One should be aware of the risks involved. In my experience with common stocks out of ten, five are promoted by those who have no intention to reward investors. About three have good intentions but fail eventually. Only two really live to tell the tale (don't turn tail!) and reward investors well - siva

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author avatar WOGIAM
2nd Jul 2014 (#)

I always have the best intentions to save but in reality, the cost of everyday living is so high, I struggle a bit.

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author avatar Ptrikha
2nd Jul 2014 (#)

Some great tips- and Kudos for sharing these- its all about keeping our investment basket wide and keeping all kinds of instruments- high risk, high return, low risk and low returns.

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author avatar Joyce Singha
8th Jul 2014 (#)

Good article.
Thanks for explaining ETFs. I tell my kids they'll won't get rich by only saving considering the pathetic interest banks have :)

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author avatar Natalia Jones
29th Sep 2014 (#)

Yep you're right.. if you rely on interest from the bank you'll never get anywhere!

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author avatar YourFriend
12th Jul 2014 (#)

Shouldn't we invest in various things instead of one.So that there will be lesser amount of risk?

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author avatar Natalia Jones
29th Sep 2014 (#)

absolutely.. I think that was the general idea :)

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