Investing: What You Need to Know to Make Your Money Grow
When it comes to the world of finance, we’re often told as children that it’s important to save our money so that our “one day” can become a reality. But as we grow older, it becomes evident that maybe our piggy banks might not be able to hold up in the long run.
Thinking about finances and how to manage your own isn’t something that crosses the minds of many until they’re thrown into the real world. Unfortunately, experiential learning in this context isn’t the greatest way to ensure that your finances are secured and that you’re on the way to living without needed to worry about your money. This is why it is so important to learn why you should not only consider investing your money, but investing into your time as well.
There are so many different types of investments to discuss and discover, and it often can often seem to become a very daunting topic for many to approach. Where do you even begin?
What is investing?
Many people use the terms invest and save in the same way; however, these two words refer to and mean very different things. It’s important to learn the different between them in order to understand how to make the most of your money.
Savings are amounts of money set aside that will not be spent. With savings over a longer period of time, there are often chances of earning interest on money that is put into a savings account. Oftentimes, banks offer HISAs (High-Interest Savings Accounts) that will provide accountholders with higher levels interest that they can earn over a certain period of time. When comparing saving and investing to understand which one is right for you, it’s important to consider what your end goal is with your money.
If you are comfortable with the possibility of risking your money with the intention of making it grow, then investing may be a choice for you. It is crucial to research the different accounts offered by your local banks in order to identify which one is the best option for you, however.
What are Bonds?
In order to grasp what a bond is, it is critical to examine the context that it is in. There are different types of bonds; most notably, there are government and corporate bonds.
Government bonds, also known as Canadian Savings Bonds (CSB), are loans that you (as an investor) make to the government. They are commonly known as some of the safest ways to invest, given the amount of security you can experience.
The government will repay you the face value of your loan with added interest on (or before) your term of agreement is over.
Alongside the security of a government bond, an added advantage is the liquidity that they offer. Government bonds are extremely liquid, meaning they can be cashed in at any time. To top it all off, government bonds can be bought for as low as $100.
Corporate bonds are the second most prominent type of bond. Corporations often need money to continue their operations in the most efficient way possible. In order to bring in extra income, they sell things called securities; these include such as shares of the company or stocks. In a corporate bond, a business will pay you back yearly, while also paying interest.
What are Stocks, and what is the Stock Market?
Buying stocks allow you to essentially “buy into” a company. Shareholders of stocks experience the rewards and risks of the company. By purchasing a stock, you can become a part-owner of the company.
If a business becomes profitable, they can pay their shareholders back in the form of dividends. Dividends are distributions of a company’s earnings to their shareholders. A shareholder can hold their stock for as long as they like, and sell it at their will; an added benefit of stocks is that (for the most part) they are fairly liquid. They are determined overall by factors of supply and demand, which can change their face value over time.
The stock market can often be seen as a very intimidating thing to approach for first-time investors, or even those with a general interest in understanding how it works.
The first thing to learn about the stock market is what it really is. A stock market is where both individuals and entities can both purchase and sell shares of a company. Stock markets can be virtual, as well as physical. Nowadays, the prominence of virtual stock markets has grown exponentially.
Before being exposed to how the stock market works, it is important to understand the rudiments of the terminology used commonly by both stock brokers and investors in that environment.
Blue chip companies are companies with long-standing records of good earnings, and consistent payments of dividends to investors. They typically have dynamic markets for their stocks. Most of the biggest and most popular companies in the world are blue chip companies. These include Apple, Johnson & Johnson, and 3M among countless others.
Growth companies are businesses whose products and services generate considerable earnings. Unlike many blue chip companies, they typically don’t reimburse their investors with dividends; rather, they reinvest their earnings back into the company to make it grow larger. If it goes out of business, shareholders will only be liable for the amount they invested into the company.
It’s critical to note that, even with years spent working in the stock exchange, investors and brokers alike can’t truly learn it all. Sean Williams, an investor with over 20 years of experience, said that “the learning never stops.” With such a vast and rapidly-evolving field, it’s no surprise that it’s quite difficult to learn the ins and outs of the field all on your own.
This is why many people trade in stocks through stockbrokers. Essentially, a stockbroker is a professional investor; they buy and trade stocks on behalf of individuals who hire them. Typically, they have expansive knowledge on the field. Many investors, new or long-standing, hire stockbrokers to help them navigate the often intimidating world of the stock market.
What are Mutual Funds, and how do they work?
The variety of stocks in a mutual fund being invested in supports the principle of diversification; this is the act of investing in multiple different stocks so as to reduce the risk of the investments.
Investment managers make decisions on behalf of investors in a mutual fund in order to optimize the chances of making money off of the stocks; however, just like with any stock, there is no guarantee of not losing any money.
So, where do I start?
An important part of becoming an investor is, firstly, understanding how investments work. After you understand the rudiments and fundamental aspects of the process, getting experience is a critical next step.
Both savings and investments are great ways of managing your money wisely when done right. In the long term, using a healthy balance of both can help an individual make the most of their money in a diversified and low-risk way.
The idea of investments is so expansive that truly doing research on the topic as a whole and understanding what specifically appeals to you and your financial goals makes all the difference when you decide what you want to put your money towards.
