Investing your money involves purchasing a particular asset in the hopes that the value of that asset will increase over time. If an asset’s value increases and the investor opts to sell that asset, the resulting gain is called a capital gain.
But assets don’t always increase in value; sometimes they decrease too. Increases and decreases can depend on market conditions at the time you invest or sell an asset, company performance, and other factors. In general, investments that are considered higher risk offer the potential for higher returns, while lower risk investments typically provide lower returns.
While people choose to invest for different reasons, growing their wealth is a common goal. Nobody invests money with the intention of losing it, whether you’re investing for retirement, college, or another purpose. But even when the market is down, investing remains one of the best ways to build wealth over time.
Returns are generally much higher than what you’d get by keeping your money in a traditional savings account. That means if you have 10,000 euros in a savings account, it will only grow 24 euros in a month. Of course, your returns will vary depending on market conditions, your investment decisions, and the assets you have in your portfolio.
Stashing cash in a savings account is different than investing it. Generally, the cash you put in a savings account is there in case you need it in the short term, while investing is a long-term strategy to grow your wealth.
Saving accounts typically offer nominal returns, while it’s possible to see much higher returns on your investments, depending on the market and your investment strategy.
Before you start investing, understanding the different investment types is important. This will help you determine which assets might make sense for your portfolio. Several investment types exist, including the following.
When you buy stocks, or equities, you’re purchasing shares of ownership in a particular company. Companies issue stocks, which are traded on a stock exchange, to help raise money for projects and future growth. Some stocks pay dividends — or a portion of the company’s earnings — to shareholders monthly, quarterly, or annually.
Depending on which platform you use, you may also be able to purchase fractional shares of stock. As the name implies, fractional shares offer a fraction of the ownership of a full share. They also sell at a fraction of the price, making them more affordable.
It’s important to analyze company fundamentals, business plans, and financial statements to successfully pick stocks. These include evaluating metrics like earnings, revenue growth, and debt levels to ensure you're making informed decisions. Given the complexity of such analyses, seeking professional help is always advised. A financial advisor can provide valuable insights and guidance, especially if you're new to investing or lack the time to perform in-depth research yourself.
Mutual funds are a basket of different assets hand-picked by fund managers and bought directly through an investment firm or brokerage account. These funds use pooled investor money to purchase stocks, bonds, and other assets.
Investing in mutual funds helps you diversify your portfolio, since you’re purchasing small portions of many assets. Diversifying your portfolio is the investor’s equivalent of not putting all your eggs in one basket. It means investing in multiple asset classes to help reduce your risk of loss during a market downturn. And many mutual funds are also actively managed, making them suitable for those who prefer to be more hands-off with their investments.
Mutual funds often require a fairly large minimum investment and charge fees. Funds also typically charge a percentage of earnings in order to manage your investments. The percentage is usually referred to as an expense ratio.
ETFs are similar to mutual funds in that you’re investing in a basket of assets. But unlike mutual funds, ETFs only trade on exchanges and can’t be purchased directly from investment firms. Think of them as part mutual fund and part stock.
ETFs can be a good choice for investors who want to diversify but also avoid the high minimum investments and high fees of a mutual fund. Unlike mutual funds, ETFs don’t have sales charges.
Index funds are a type of ETF or mutual fund that are designed to mimic a familiar stock market index, like the S&P 500 or the Dow Jones Industrial Average. That means that the index fund’s investments align with investments in the index it tracks. Since index funds aren’t handpicked by financial experts, they are also cheaper.
Like mutual funds and ETFs, index funds can be a good way to diversify. And because they automatically track a particular index and aren’t actively managed, they’re a fairly simple and low-cost investment.
Companies and governments issue bonds when they need to raise money. These investments act as a loan to the issuer, which is the company or government offering the bond. Bonds are often issued to fund specific projects or finance operating costs.
In return, the issuer agrees to pay you the face value of the bond — your principal investment — plus interest. Bonds generally come with a set interest rate, and investors typically receive interest payments twice a year.
Bonds are considered a relatively safe investment, offering guaranteed returns for investors as long as the issuer can afford to repay their debts.
Cryptocurrencies are digital currencies that exist on a specific network, or blockchain. Rather than a bank acting as a middle-man, investors can exchange cryptocurrency directly over the internet.
While popular cryptocurrencies like Bitcoin saw record-high values, cryptocurrency remains a largely speculative investment. The crypto market is also volatile and investors face regulatory uncertainties and security concerns.
This chart showcases the impressive growth of a 10,000 investment in the S&P 500, with additional monthly contributions of 100 euros, over a span of 30 years. Utilizing actual historical returns, it vividly demonstrates the power of compound interest and regular investing. Each bar represents the end-of-year value of the investment, reflecting both the rise due to market gains and the incremental increase from continued monthly contributions. Consistent investments, even in small amounts, can substantially build wealth over time through the financial principle of compound interest. The strategy of regularly investing in a diversified stock index like the S&P 500 can yield significant returns, reinforcing the importance of persistence and long-term planning in investment portfolios.
If you’d like to start investing, it’s a good idea to take the following steps first.
Are you planning to invest for college, retirement, or another large expense? Think about the reasons you’re investing and what you’d like to accomplish with your portfolio. Keeping these goals in mind will help you stay on track, even during market downturns.
You could opt to invest a lump sum or a certain amount regularly. But first you need to decide how much you can afford to invest. Look at your budget and savings, and determine which amount makes the most sense for your financial situation.If you want to invest monthly, make sure you include those amounts in your monthly budget.
Are you comfortable with uncertainty and a high risk of loss in exchange for higher potential gains? Or do you prefer a more reliable, lower-risk approach to investing? Determining your risk tolerance is key and can help inform your investing decisions.
Some investors prefer to trade actively, buying and selling assets multiple times each day. Others prefer a more passive approach, investing in index funds, mutual funds, or ETFs, and simply letting their money stay put. Active traders may need different tools and investing apps than passive investors. It is always best to seek professional advice.
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