Investing can be one of the best ways to help your money grow. If you have a goal, like being able to retire someday, investments can offer a greater chance of increasing in value at a faster rate compared with money placed in an interest-bearing account. Here are the basics.
How to start
If you're saving for retirement, you can pick a savings method before you select your actual investments. Many companies offer employees 401(k) and Roth 401(k) plans, and may even match a part of the money you choose to contribute. If you have that option, it's a good idea to sign up and put in as much as your employer will match, because it's like receiving free money.
You could also open an individual retirement account, or IRA, at a financial institution. With a traditional IRA, you contribute from your pay before taxes, which can reduce your tax obligation. Instead, you pay taxes on money you withdraw from the account. A Roth IRA, like a Roth 401(k), lets you contribute from your after-tax pay, but your withdrawals can be tax-free, including any investment gains.
You don't need a lot of cash to begin investing. If you participate in a 401(k) plan at work, your employer will simply start taking the contributions from your paycheck, once you agree to join the plan. And many financial institutions don't require a minimum amount to open an IRA.
Outside of a retirement plan, a brokerage firm may require a minimum that could range from $100 up to a few thousand dollars, depending on where you invest.
Types of securities
Once you have your plan in place, you can choose your investments:
- Stocks. When you buy a company's stock, you're becoming a part owner. If markets show that a company's value is increasing, then its share price rises, but if the company's value drops, so does the stock. Stocks are usually riskier than other types of investments, because the value could increase or decrease sharply at the mercy of the market, but historically speaking, money grows faster when invested in stocks than other investment options. Stocks are more prone to losing value, however, so tend to be better for people who can tolerate more risk in hopes of earning a better return.
- Bonds. If you buy a bond from an issuer, you're generally lending money to a company or government entity. The issuer promises to pay you back with interest, just like with any other loan. Monitoring agencies rate these issuers on how likely they'll be able to repay. The higher the credit rating, the less interest the borrower usually has to pay to investors like you, but there's also less chance of a default, when the issuer fails to make its payments. Bonds are generally less prone to sudden movements in value and can be better for investors who want less risk.
- Mutual funds. With this type of investment, fund managers pool money from different investors, then select and buy a group of securities, including stocks, bonds or other things, depending on the goals of the fund. Mutual funds are a good option for people who don't have a lot of time to research individual securities. However, most charge fees to investors, which can reduce returns.
Investing is a key part of personal finance. You can take advantage by learning about securities, contributing to an account and building a healthy portfolio.
© Copyright 2016 NerdWallet, Inc. All Rights Reserved