Investing is the general term for placing money, or assets, in a fund, or program, in order to realize a return. Investing is a very broad term and can include stocks, bonds, real estate, mutual funds, and a number of others. When you are considering entering into the investment market it may seem complex and; to an unskilled, or novice, investor, be a form of gambling.
When investing for beginners you will want learn a great deal about certain aspects of investing. Do I need a broker?; What kind of investments are out there?; What investments are right for me?; and the common terms used in analyzing investment options.
A broker is an individual whose profession is to help individuals invest their money in securities. Brokers come in many shapes and sizes. Brokers can specialize in real estate, stocks, bonds, futures, commodities, mutual funds, and a number of other areas. Some brokers deal specifically with a certain type of security whereas other will be able to help you invest in any and all securities that you may be interested in.
When looking for a broker you have two general options. You may take advantage of a traditional broker, and brokerage house, or you can use a discount broker. A traditional broker is an individual, usually associated with a brokerage house, who will, not only purchase the securities you wish for your portfolio, but give you investment advice and offer a range of investment opportunities. On the other side of the coin are the discount brokers. Discount brokers tailor to the self-directed investor and generally leave the investor to make their own decisions.
Investing for beginners is most advantageously done through traditional brokers. There are many advantages and disadvantages when an investor is considering whether to use a traditional broker or a discount broker. Traditional brokers are expensive and their services will cost you much more than a discount broker. In exchange for the higher fees a traditional broker will work with you, one-on-one, to help you devise investment strategies, build a portfolio, give you information on how your investments are doing, and often be available for phone conversations or through e-mail to discuss your investing. Another advantage of dealing with a traditional broker is their expertise in the field. Traditional brokers make their living investing in securities and have garnered a wealth of experience determining which investments are sound and which are risky ventures. By hiring a traditional broker a beginning investor will be able to compete in the investment market without suffering from his, or her, lack of expertise.
Disadvantages to using a traditional broker are that they can be expensive. Because you are getting the one-on-one advice and expertise of a professional investor the costs of that will be much greater than when you use a discount broker. Another disadvantage that may come from the use of a traditional investor is neglect. Traditional investors have many clients and most often than not the beginning investor does not have a lot of capital invested through the traditional brokerage house to warrant the individual time that an individual who has a lot of money invested will. Because of this the beginning investor may find it hard to get in touch with their traditional broker to stay abreast of certain investment situations.
Discount brokers are another option when considering investment opportunities. There are numerous options for discount brokers in the investment market. Some of the most popular discount brokerage houses are E-Trade, Ameritrade, and TD waterhouse. One of the advantages to having a discount broker is that the cost is fairly minimal. For use of the service the discount broker will usually charge a fee of between $8 – $30 per transaction; they may also require you to pay a nominal monthly, semi-annual, or yearly fee. In addition, a discount brokerage house will allow you easy and, almost instantaneous, access to investing. You will be able to invest from your home, online, and easily place orders for the buying and selling of securities.
The disadvantages associated with discount brokerage houses are high and it is usually not recommended when investing for beginners. Discount brokerage houses, when you are a beginner, are, in a way, a legalized form of gambling. Discount brokerage houses offer investors a plethora of information and give the investor every opportunity to use that data to research stocks, bonds, etc. However, when investing for beginners the information supplied can be complicated and often times when a beginning investor attempts to navigate that information they will either ignore it or be confused on what is the right option. A traditional broker will be able to walk you through all this information and help you come to a conclusion on how you should invest. In contrast, a discount broker will leave all the decisions up to you. Another disadvantage to discount brokers is akin to “drunk dialing.” With the almost instantaneous access to discount brokerage houses an investor can make quick, and often hasty, decisions when it comes to investing. A beginning investor may see a news report about a certain product, or corporation, and without doing research or thinking about it logically the beginning investor can put $1000 down and order the purchase of securities. If you go through a traditional broker you will have to call him, or her, and place your order personally, or over the phone. Your traditional broker will be in the best position to help you analyze your decision and make sure it is wise and you’re doing it for the right reason. After all, when you make money the traditional broker makes money and when you lose money it looks bad for your traditional broker.
Alternatives to Brokers
Going through traditional and discount brokerage houses are not your only option. When investing for beginners it is always a good idea to put your capital into “blue chip” investments. Blue chip investments are those that have been considered, through years of existence, to be sound investments. They may not give the investor the yearly returns that they would from “penny stocks” but the existence of the security is consistent and it is a very sound investment. Blue chip stocks are those that an investor will purchase as a long term investment. These kinds of securities are the major corporations such as IBM, Apple, Disney, Google, Microsoft. They should be purchased and forgotten about until one day, 30 years from now you decide to sell those securities.
Investing in blue chip stocks can occur through a few different avenues. The most basic way is going directly through the company itself. When your are investing for beginners you will often want to invest in one or two companies that you know will do well. The advantage to this is that you will avoid all costs associated with a broker, traditional or discount. The trade itself will cost you nothing and your only expense will be for the security itself.
Once you are invested in the security you will be considered an owner of the company. Depending on the type of security you purchase and whether the security is “common” or “preferred” you will be given different rights and liabilities. We will not get into the different types of stock you can purchase in this article.
Once you are an “owner” of securities in a company you can continue to invest in that company in a number of different ways. The first option is to have a Dividend Reinvestment Plan. A Dividend Reinvestment Plan will allow the securities holder to automatically reinvest any dividends, if their security allows for them, back into the company for the purchase of more securities. One of the advantages of this is that you do not necessarily have to put the money in to purchase an entire share in the company. Often your dividend reinvestment will only give you a fraction of a share, this may seem small but when you purchase directly you will often be required to purchase an entire share or nothing. A dividend reinvestment plan also allows the investor to authorize a direct withdrawal from your bank account on a monthly, semi-annual, or annual basis for the re-investment in the security. This is beneficial if you like the security and, especially with blue chip stocks, it allows for continuous investment in a long term security without having to think about it.
Types of Securities
There are numerous types of securities that you should think about when investing for beginners. The traditional types are stocks, bonds, mutual funds, and real estate.
Stocks are essentially part ownership in a company. The company can be either privately or publicly owned and is a great investment for those who are skilled in investing. Stock takes on many different forms and some include voting rights while others include dividends and other perks. When you invest in a stock your value in the stock will increase or decrease depending on the fluctuations of the companies value.
A bond is different from a stock in that a bond gives the investor no ownership in the company. A bond acts more like a debt owed than anything else. When a company, or government entity needs to raise capital they will often sell bonds to investors. The bond allows for the company, or government, to raise money with the requirement that they pay the investor interest that will accumulate over the period of the bond. A bond can be short term or long term and the return on the investment, unlike stocks which can be risky, is relatively fixed and is a great form of long term, stable investing. Investing in government issued bonds are one of, if not the most, stable forms of investing and you will be virtually guaranteed to benefit. The disadvantage of bonds is that the rate of return is low, usually around 5% of the initial investment.
A mutual fund is the pooling of money into an investment fund that focuses on investing in certain stocks, bonds, and commodities. Mutual funds, unlike stocks and bonds, are not directly purchased by the investor. In a mutual fund the investor will give capital to a mutual fund. The fund manager will then take all the pooled money from all the investors and purchase stocks, bonds, commodities, etc. that are in line with the mutual funds investment strategy. You can get involved with mutual funds that focus primarily on energy stocks, entertainment stocks, or a number of other specialized industries. Mutual funds are often the easiest and most stable forms of investing because you are taking all the decision making out of your own hands and entrusting a specialist to diversify and invest.