Introduction to investing guide
If you want to manage your money, there are several ways to do this. The first way is to put your money in a savings account. You then receive a low-interest rate and, due to inflation, you actually lose money. But you can also invest your money in bonds or shares, something that takes more energy, but also gives you a higher return! In this introduction to investing, we discuss everything you need to get off to a flying start!
Saving versus investing
Many young people grow up thinking that saving is the best thing you can do. This is partly true: if you don’t save at all, you quickly get into trouble. It is therefore important to put enough money aside to be able to solve problems in the next 0 to 5 years. However, if you earn a nice salary, it is wise to invest some of it as well.
This is because the interest you receive on a savings account is very low. Inflation and taxes reduce the real value of your assets. By investing your money in a smart way, you can actually build up a good amount over a longer period of 10 to 60 years.
Warren Buffett sums it up nicely: investing is putting money aside to receive more money in the future. In practice, you will therefore achieve a much higher return with investments than with savings.
An important part of the introduction to investing is the principle of compound interest. As an investor, you receive return on return: in the long run, your capital grows exponentially.
Of course, there is a risk associated with investing: stocks have an average return of 7 to 8 percent, but the risk of this type of investment is also higher. Especially in the short term, you can lose money with investments. With a savings account you know for sure that the money will still be there tomorrow.
A good way to deal with this is to periodically step in. You can do this by investing your money in an ETF, for instance. An ETF invests your money in various shares for you, which spreads the risks nicely. Moreover, the transaction costs for this type of investment are low, so you can even get started with a small amount of money.
If you are smart about investing, you will reap the rewards in the long run. Many people react quite impulsively when they learn about the stock market: they try to predict the market and apply complicated strategies. If you like this, you can certainly do it. However, for most people, this is not the best strategy.
By starting young, you can build up a large fortune even with a small amount of money. With a monthly investment of $200, for example, you could be a millionaire by the time you are 65. Patience, spreading your risks and following your plan are therefore important factors when you start investing.
How do you start investing?
After this short introduction, you are well-prepared to take the first steps and make your first investment. Investing is done at a broker: a broker is a party that can buy investment products on your behalf.
Opening an account at a broker is usually free. You only need to leave some basic information so that the authorities have an overview of everyone’s assets. Use the button below to find out which brokers offer favourable conditions for your investments:
Introduction to your first investment: a plan
Before you start investing, it is advisable to draw up a clear plan. First consider what your WHY is or the reason why you want to start investing. Do you want to buy a house in a few years’ time or are you busy building up your pension? Whatever your goal, it is always important to work towards it with a plan.
Then see which HOW suits you best. If you want to build up your assets slowly, you can invest in one or more ETFs according to the dollar-cost averaging principle. You then invest a fixed amount every month without looking at it too often. However, if you want to invest actively to build up an income, it is best to start day trading.
An important part of your investment strategy is deciding how much money you want to invest. Only invest money that you can afford to lose in the coming years: that way, if the market does not perform well, you do not have to exit at an unfavourable moment.
After you have started investing, it is wise to keep track of your progress, especially in the beginning. That way, you can be sure that your investment plan is right for you.
Methods of investing
So, if you want to manage your money, you can put it in a savings account. But this is not a real increase in the value of your money, as the annual inflation cancels the return on the interest. Another way to invest is to invest your money in governments and companies, which are remunerated. This type of investment includes investing in stocks and bonds. What can you invest in?
- Shares: buying and selling ownership of companies
- Bonds: trading in debt securities of companies and governments.
- Forex: short-term foreign exchange trading.
- Options: these allow you to speculate on, for example, stocks.
- Commodities: think for example of gold and silver.
- CFDs: for short-term trading where you can also bet on falling prices.
Speculate or invest?
When talking about investing in shares or bonds, the word “speculation” is often used. This deserves some explanation. Speculating refers to trading in stocks or bonds to make a quick profit. The word investing, is often contrasted with this. Investing is more focused on the long term.
If you want to actively trade in the short term, it is wise to open a free demo account with a broker. This way, you can practice short-term trading and learn to recognize the patterns. However, if you want to trade passively and for the long term, it is wiser to place your money on a trading account.
To enable growth and investment, companies need to use money. They can get this money from previous profits or by issuing shares. When the value of a company increases, the value of its stocks usually increases as well. In exchange for buying shares, the company often makes a dividend payment to the stockholders (distribution of a part of the profit).
Play it safe with bonds?
It is also possible for companies to issue bonds to raise money. This can best be seen as taking out a loan from the bondholders. The big difference with shares is that someone who buys bonds is not co-owner of the company. Instead, he has an IOU from the company in his hands. In short, a bondholder lends money to a company in exchange for interest and an IOU.
Achieving price gains
In short, as an investor you can increase your assets with, among others, stocks and bonds. In the case of shares, the stockholder is paid a dividend, and in the case of bonds, an interest is paid.
But there is another way to make a profit with shares and bonds. By selling the stocks or bonds, a profit can be made, as a result of price differences. If the share or bond is worth more at the time of sale than at the time of purchase, you have made a price gain.
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.