How To Start Investing: Goals, Risk Tolerance, and Investment Securities
Investing is a way to make your money work so that it's worth more tomorrow than today. It means buying and holding investment securities, such as stocks, bonds, mutual funds, crypto assets, commodities, real estate that can outpace inflation over time.
When an investor buys and holds stocks, their money can grow through stock dividends, which the shareholders can then choose to reinvest to buy more shares of the company, buy stock in a different company, save the cash, or spend the money.
Regardless of whether the company's stock price goes up or down, you would receive those dividend payments as long as the company continues to pay them.
Before you start investing, make sure you have a manageable budget, a reliable emergency fund and that you've eliminated high-interest credit card debt. Generally, 10% of income is a healthy beginning target for long-term investing.
To get started on investing, start by setting your goals and a timeline (college savings, purchase of a home, retirement). Determine what type of investor you are. Do you have a high-risk tolerance, or are you risk averse? How much can you afford to invest? Are you an active or passive investor? Which investment type is right for you based on age, timeline, risk tolerance, income and taxation?
It’s important that you diversify your portfolio, invest only in businesses you understand, learn the basic concepts for evaluating stocks.
Over the long term, growing wealth is the most important step. Once you've built that wealth and get closer to your financial goal, fixed-income investments such as bonds can help you keep it.
There are three main kinds of bonds:
- Corporate bonds, issued by companies.
- Municipal bonds, issued by state and local governments.
- Treasury notes, bonds, and bills, issued by the U.S. government.
In the U.S. you have to be 18 years old start your own investment account but adults can open minor accounts for younger children. To do so, first decide which investment account is best for them based on whether they have taxable income or wages.
Under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act (UGMA/UTMA), you can open custodial brokerage accounts for minors without taxable income or a custodial IRA for those who do.