From diversification to stocks and individual retirement accounts (IRAs), learning the investing basics can be a little overwhelming if you're a first-timer and not familiar with the investment world. As you get started, there may be some basic questions that you don't know how or who to ask. Don't worry — everyone has to start somewhere. Here are six common questions, and their answers, to consider as you get up to speed.
1. How Do I Get Started Investing?
Even if you only have a small amount of money to invest, you can likely get started. Some people start by enrolling in an employer-sponsored retirement plan, like a 401(k). Recent U.S. Department of Labor research indicates 54% of Americans have retirement benefits through work. Another option is to open an investment account through a bank or investment broker, who can help you buy and sell investments. With this approach, you'll likely have to pay trading and annual fees and other service costs.
Regardless of what option you choose, you'll probably want to do your research to understand each type of investment that you're interested in pursuing, and exactly how you could earn a return on each. It's crucial to note, however, that no investment of any kind can guarantee growth, and may instead lose value over time.
2. What Is a Stock?
With stocks, you invest money in exchange for a share of ownership in a company. Each stock has a specific dollar value connected to the overall value of the company.
Stock prices go up and down based on changes in the market. A company underperforming in a specific quarter or a damaging news report for the company's image are just a couple of factors that can make the stock price go down, which means your investment would lose money. There is a possibility that that could turn back around if you hold onto your stocks, but again, there is no guarantee.
3. What Is an IRA?
IRAs are retirement plans that are similar to 401(k)s, but are typically not managed by your employer. There are seven types of IRAs: nondeductible, Roth, Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE), spousal, self-directed and traditional.
Each comes with different annual contribution limits, rules and tax implications. You may want to consider working with a financial professional to see which type may be appropriate for you.
4. What Is Diversification?
Diversification is the practice of putting your money in multiple investments and investment types. The goal with this strategy is to ideally reduce your overall investment risk; if one investment doesn't perform well, another one may possibly do better and still produce a net gain. This approach is also not perfect, though — it's still possible to lose money across your investments. With any strategy, it's critical to thoroughly research and inform your decision-making.
5. What Is a Mutual Fund?
You can buy shares in a mutual fund, which is a professionally managed portfolio that combines money from several investors to buy an array of investments, like stocks and bonds. As a result, mutual funds employ diversification to potentially spread out your risk.
Like any other investment type, markets may not go your way, so it's important to keep track of what's happening to your money if you do choose to invest.
6. Should I Invest?
The answer to this question is a matter of preference — and your risk tolerance. Some people are more comfortable putting their money in a low-interest savings account where it's safe, but others would rather take risks to potentially land a bigger reward.
The key with this approach is to do your due diligence. You'll likely want to research different types of investments and even individual stocks if you decide to go that route. You may find an employer-based retirement plan more appealing because it requires less maintenance. Or you might prefer having more choice and control by opening a brokerage account where you can select the investments.
In the end, investing comes down to your personal financial goals. Whatever you decide is best for you, considering these investing basics first may help. If you need more information before you get started, consider meeting with a financial representative.