The Basics of Investing (For People Who are Scared to Invest): Part 1

grow-your-moneyI am what you would call a novice at investing in the stock market. I am a beginner and I am totally not ashamed to say it. The truth is there are a lot of people like me in the world. The only difference is that I happen to be fortunate to write in personal finance and, therefore, am able to learn more about investing everyday. I am happy to say that I have learned so much more than when I first started. I am still actively researching in this field and have come up with a few key things that I consider vital for beginner investors:

Stocks

Let’s start with the most basic of definitions for investing and that is a stock. A stock is simply a piece or a share of a company that you own. Prices obviously depend on how valuable the stock is at that time and is constantly changing.

Dividends

This is probably one of the most interesting parts of the investment process. A dividend is simply a payment that you get from a company for buying and holding a stock.  Dividends are usually not paid out unless the company experiences profit. Usually dividends are paid for bigger companies but not always. Investors tend to get really excited over dividends for all the obvious reasons. Who doesn’t want cash at the end of the quarter or whatever for just holding on to something? Umm, thats a no-brainer.

Bonds

A bond is just another form of a debt that you can buy in an effort to collect interest or cash payment. A good example of this would be a savings bond that can be bought from the government. Usually there is a period of maturity that must be met before you can get your money back. Many people consider this a safer investment as you are almost guaranteed to get your original cash amount back, but this also means there is usually a smaller amount of return versus other investment choices.

Mutual Funds

Here is a classic case where a group comes together. A mutual fund is basically where a pool of funds is collected from many people in order to buy stocks or other investment choices. For those that love diversity, mutual funds are a great option as they allow you to purchase several different stocks. As the old saying goes, you never want to put too many eggs in one basket. The same is true for the stock market. If one investment turns sour, then you have the peace of mind to know that you have put your money in other places.

I know that investing can be scary for a lot of people. It certainly scared me for a while. The truth is that with a little research, investing starts to look less scary and more necessary especially when you are talking about building your wealth. Hey, why run away from something that has the potential to bring you significant wealth over the years. That is not to say that you can’t lose your shirt by investing badly. There is always that risk but it should be thought of as another tool to help build your financial future. After learning the basics, it seems a whole lot less scarier and even a little fun.

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