Kyle MorelNorthJersey.com
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Everyone loves to make money, and one of the most popular ways to do so is through investing.
The practice requires relatively little work compared with a regular job and, when done properly, can set up an investor to reap the financial rewards down the line. But it can also be confusing and potentially costly for newcomers unfamiliar with the multitude of terms and strategies available to the public.
Below are some tips and tricks of the trade for novice investors to ensure they are prepared for the investment world.
401(k)s and IRAs
Retirement savings plans are often the best place to begin investing, according to the finance company Bankrate. The most common, a 401(k), allows people to contribute part of their salary toward a retirement fund each year.
Many employers offer matching 401(k) contributions up to a certain percentage. For workers in that situation, according to an article from NerdWallet, their first step to saving for the future is easy.
"Contribute at least enough to that account to earn the full match," said Brianna McGurran, a NerdWallet columnist. "That's free money, and you don't want to miss out on it, especially since your employer match counts toward that goal."
Another option for investors whose company does not offer a 401(k), or who simply want to save more money, is an individual retirement account. A traditional IRA, similar to a 401(k), allows the person to let money grow over time and pay taxes only when it is withdrawn. For a Roth IRA, income is invested after taxes but is not subject to any fees upon withdrawal.
Stocks and bonds
Investors can also put some of their money in stocks, which give them a partial ownership stake in a business, or bonds, in which they lend money to a company and are paid back that amount plus interest over time.
Bonds are generally not as volatile as stocks and result in a fixed income for the investor. However, the lower risk results in smaller long-term returns, NerdWallet said.
Stocks, on the other hand, can be lucrative over many years but fluctuate wildly in the short term. Thus, investors in the market should be prepared to weather the storm and hold on to their shares for at least several years.
"Some people want a quick score in the stock market without experiencing any downside, but the market just doesn’t work like that," said James Royal, a wealth management writer for Bankrate. "You must endure down periods in order to enjoy the gains."
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Direct vs. indirect stock ownership
There are two ways to own stock: direct and indirect ownership.
Direct ownership involves purchasing stock in individual companies — usually through an online brokerage account like Charles Schwab, Fidelity Investments or E-Trade. Some companies, including Walmart or Coca-Cola, offer their own plans that allow investors to buy shares directly from them.
The drawback to direct ownership is the time it takes for one person to sufficiently monitor the performance of each share. Indirect ownership, on the other hand, relies on mutual funds or exchange-traded funds that invest in hundreds or even thousands of stocks for a wider range of outcomes.
For beginners, NerdWallet suggests using indirect ownership for the majority of an investment portfolio and choosing an individual stock only if the company's long-term growth potential seems viable.
Don't make simple mistakes
Investing can be complicated, and careless actions and strategies can cause unnecessary difficulties in the process.
Among the most frequent mistakes new investors make is focusing too much on their accounts. Bankrate cited research from Index Fund Advisors that showed actively traded funds actually generate less money than passive funds.
"Your money will grow more and you’ll have peace of mind if you keep yourself from checking (or changing) your accounts more than a few times each year," the article said.
Investors should also use each of their accounts for its intended purpose only. For example, someone using 401(k) plans and IRAs for non-retirement payments will likely have to pay taxes and other financial penalties. And taking out a 401(k) loan would not only wipe out any potential gains from that money, but also require the borrower to repay the loan or face a 10% penalty on the remaining balance.
The prospect of putting money at risk can be daunting, and there may be expensive consequences if investors are not careful. But with some basic knowledge and economic savvy, those who start the process early will be better equipped for financial security and retirement when the time comes.
