What You Need to Know to Start Investing Your Money from Scratch

The term “investing” might conjure images of bankers in suits or individuals with lots of extra money on hand. But in 2022 investing is a money-making tool accessible to everyone, not just the super-wealthy!

There are lots of ways to start investing from scratch no matter how much cash you’re starting with. 

CARD created this beginners guide to answer some common questions and help kickstart your empowering investment journey. 

How has investing changed?

Over the last few decades lots of companies have made it their business to provide access to a wide range of investment opportunities. 

 Thanks to the internet, trading markets have become more accessible and financial literacy has increased. There are a slew of apps available for download that have turned investing small amounts of money into attractive game-like interfaces. 

The COVID-19 pandemic has also led to what one Business Insider article calls a new “army of day traders.” 

🆙 Between the second and fourth quarter of 2020, the markets saw a 15% increase in Americans invested in stocks or mutual funds. 

👥 As of 2021, one out of every five Americans (20%) are invested in the stock market. 

💻 One poll found that in early 2021, 28% of Americans bought viral stocks (like Gamestop) based on the fervor created by armchair investors on the Reddit thread r/wallstreetbets

The bottom line is that these days you don’t have to look or act like someone out of The Wolf of Wall Street to invest your hard-earned money. You can get started with as little as $100

All it takes to get started is a bit of research and some reflection on your financial goals and lifestyle. 

Why should I invest?

When it comes to making money or accumulating wealth, there are two main ways to do it. The first is what immediately comes to mind – working and earning your paycheck. 

The second method is investing your assets (your money, or things you’ve purchased with your money) so they increase in value over time. If you’re looking for another way to grow your wealth (aka earn more money) investing could be for you. 

Here it’s worth mentioning that not all investments increase in value over time and can rise and fall in value at the mercy of factors like market volatility. That’s where investment strategy and risk-management come into play. 

Investing can be a super smart money move when it comes to setting yourself up for your dream lifestyle. Think: a comfortable retirement or paying for your child’s future college career without having to take out loans

What is the advantage of early investing?

The short answer? Compounding: When you grow the value of an investment by letting it become more valuable (and/or regularly invest more money in it) over a long period of time. 

For example, let’s say you invest 100$ and your chosen investment has a 5% average annual return, meaning it usually increases 5% in value each year. After the first year, it will only be worth about $105. But if you hold onto it for 20 years, it will now be worth more than double your principal at about $265 dollars! Then add in the fact that you can invest more annually (or monthly) and you’ll see even more returns. If you invested an additional 100$ each year, after 20 years that 100$ investment could be worth about $3,472! 

Again, not all investments steadily increase in value and there are never any guarantees when it comes to the free market. 

However, it is well established that longer-term investments tend to be more tolerant of market volatility and yield solid returns over time. With that in mind there are real advantages to starting your investment journey as soon as possible – and it’s never too late! 

What are investments and how do they work?

First let’s nail down a working definition of what an investment is. 

In an op-ed for Fortune Magazine, legendary financier Warren Buffet defines investing as “forgoing consumption now in order to have the ability to consume more at a later date.” 

Essentially investing is spending money now by purchasing an asset to make more money over time. The increase in an asset’s value over time is called appreciation.

When you invest in an asset and it appreciates to a higher value, you can sell that asset for a higher price than you paid and make money. We call this method of growing your money capital gains. 

But you can also invest in assets that generate cash flow over time. Instead of making money buying and selling assets you can purchase assets that provide cash flow while you hold onto them. One of the most common examples of this is purchasing stocks that pay dividends

With these basic functions in mind, there are endless money moves that could be considered “investments.” But for the purpose of this beginner’s guide we are going to focus on market investments

Here are three main types of investments that you should know about…

3 Key Investment Types

📈 Stocks 

Stocks, also called equity, represent “ownership” of a small chunk of a corporation. Corporations sell stock to generate money to pay off debt, launch new products or expand into new markets. When referring to units of stock in a specific company, we call them shares. When a company is successful the value of it shares tends to increase (*and visa-versa). Sometimes companies are able to make payments called dividends to their shareholders in the form of cash or additional shares. 

🤝  Bonds 

In basic terms, a bond is a type of loan taken out by a company. Instead of going to a bank, a corporation that needs more money will sell bonds, units of debt, to investors. You pay a certain principal price for a bond and get what’s called an interest coupon in return, which establishes the rate of interest the company promises to pay on your investment. Each bond is unique and everything is pre-agreed upon with a legal document called an indenture. It formalizes the bond’s principal, interest rates, maturity (the amount of time the company is obligated to pay you interest until you get your principal back), security (whether or not the company offers collateral in the event of default), and tax status. 

👨🏻‍💼 Mutual Funds + ETFs 

If you want to invest your money in a diversified portfolio managed by a professional, mutual funds and exchange-traded funds (ETF) are a great option. Essentially, you invest money in a management company or brokerage firm. They then add your money to a pool that they use to purchase a wide variety of stocks, bonds, and other securities. So, what you end up with is a happy little diversified basket of investments. Mutual funds and ETFs are generally regarded as lower-risk investments; Even if one stock in the portfolio decreases in value, your overall investment doesn’t necessarily depreciate.

What are the first steps to becoming an investor?

1. Take stock of your assets

Simply put, the first thing you must do is decide how much money you are able to invest! Once you’ve mastered money management basics like budgeting and saving, investing is the natural next step. It’s worth considering whether an investment expert is within your budget, especially if you’re brand new to the markets. The cost of shares can vary widely from a few dollars to a few thousand dollars, so do some research to align your investment goals with your investment capacity. 

2. Choose an investing strategy

Decide the method by which you are going to invest your money, choose the different types of investments you’ll make, and evaluate how much risk you are willing to take on. 

Start by answering these questions: Am I investing to meet short-term or long-term goals?  How long until I want to retire? Do I want to be a passive or active investor? What types of companies do I want to support with my investments?

 3. Figure out your risk tolerance

One of the most important things to consider as a beginning investor is risk. All investments carry some level of risk, whether from market ups and downs, individual business decisions, or changes in regulations from political legislation. 

However, it is also true that some investments are riskier than others – but high risk can equal high reward. Ideally you want to strike a healthy balance between ambitious investing in high-yield opportunities, and investments that let you sleep soundly at night.

You can manage your risk by diversifying, closely tracking market activity, or paying a professional to monitor your investments. 

4. Choose between an active or passive investing account

You’ll need to decide what type of account you are going to open in order to access the markets. Basic online brokerage accounts and robo-advisors are a great way to get started with very little cash. 

A DIY Option: Open an online brokerage account, do your research, and start picking and choosing your own stocks and bonds. Your options with these accounts range from expensive, full-service wealth management to a basic intermediary between you and your investments. The online versions of these accounts tend to have low-startup costs and are a great option for investors looking to become active traders. Keep in mind that these types of brokerage accounts tend to require more attention and upkeep on your part than automated accounts or those run by a professional investment manager. 

A lower-effort option: Get all the perks of stock investing without actually having to research and manually choose the best shares. Using algorithms, robo-advisors will do all that market research for you at a fraction of the price of human managers. As a result, they have fewer requirements and usually cost significantly less up front! Robo-advisors also automate the management of your investments while you sit pretty and track your progress. You can even open an IRA through a robo-advisor

5. Start investing through your employer

One of the easiest ways to embark on your investment journey is to start contributing money to an employer-sponsored retirement plan like a 401(k) or IRA. You can even start by investing 1% of your paycheck, an amount you’ll barely notice is gone. Many companies match your contributions to 401(k)s. Yep, your employer will give you money in exchange for simply putting some cash towards your retirement! With an IRA (Individual Retirement Account) there are no employer contributions, but you can get tax breaks from long-term investments. 

Recap

Remember, you don’t have to be rich to start investing! All it takes is some financial education, self-reflection, basic money management, and the drive to achieve your financial goals.  

The landscape of investing has shifted over recent years, and today there are no shortage of opportunities to get started with little experience and small amounts of cash. In this golden age of individual market investing, it’s never too early or too late to start putting your money to work. 

Start by familiarizing yourself with common investment types and strategies and pick what’s best for you based on your income, lifestyle, and dreams.

Use the information and steps above to get started, and never ever stop learning. 

Do your research to understand the pros and cons of each investment option and find the investment option that is best for you!

Happy investing! 💸

Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or investment advice. You should consult your own tax, legal and financial advisors before engaging in any transaction.

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