A lot of people are intimidated by the idea of investing. Everyone understands the importance of saving money.
Saving money allows people to put money aside to use it in the future for one reason or another. Reasons may include saving for a life event (wedding, car, down payment for a house, college tuition each year, etc.) The list goes on.
Investing is different, however. It doesn’t really take the place of saving. Instead, it goes hand in hand with saving to make someone financially well-balanced. So what is investing, and why is it important? In this lesson, you’ll learn:
- The difference between saving and investing
- Types of Investments
- How to Start Investing
- How to Invest With Little Money
Investing vs. Saving
Simplified, investing is the act of putting money into an endeavor that is designed to either create an income, create a profit, and/or create wealth.
Let’s dig a little deeper, and I’m sure you’ll see the difference. Below are some of the key differences between Saving and Investing.
- Short Term – Generally, this is money that you may want access to right away, such as saving for an emergency fund
or planning a vacation in the next year or two.
- Easy Access – Money in a savings account or hidden in a shoebox can be obtained within a few minutes.
- Little Risk – If money is stored at home, there is no risk of losing it unless it is illegally stolen from you. If it is in an FDIC insured bank and the bank was to go out of business, your money is still insured, and you will still have access to it.
- Small Interest – Usually, money saved in a bank will garner a small amount of interest. Money kept at home will obviously give you no interest.
- Longer-Term – Generally, this is money that you can part with for a minimum of 3 to 5 years (sometimes longer.) Examples may include saving for a child’s college, planning retirement, or growing money beyond what a savings account can offer.
- Harder to Access – Depending on the type of investment, money may be harder to access until a certain pre-determined term has elapsed or until processing takes place.
- There is risk – No investments are without risk. Some are riskier than others. Risk is the reason there is a lot of opportunity with investing but also the reason you shouldn’t invest money that you rely on for basic bills, necessities, or emergencies.
- Potential Profit – This is what investing is all about. If invested wisely, the investment can make a lot of potential profit that would be unimaginable in a savings account.
Now that you are a little familiar with the differences between investing and saving, let’s talk about the different investment types.
Types of Investments
There are many types of investments. For the sake of this lesson, I’m going to discuss 4 types of investments. Future lessons and articles on this website may have other examples.
For now, I would like to focus on Mutual Funds, Exchange Traded Funds, Stocks, Bonds, and Real Estate, and Precious Metals.
If you understand the difference between these investment types, you will probably be able to identify other potential investments independently.
- Mutual Funds – Professionally managed portfolios of stocks and bonds. If you put your money in a mutual fund, a fund manager will diversify your money along with many other people’s money into a mixture of stocks and bonds. Depending on the fund will determine the amount of risk you are accepting. The good thing about a Mutual Fund is that it is safer than handpicking 1 or 2 stocks yourself, and the money is managed for you. A drawback is that there is obviously a fee that will go along with this. It’s important to choose a Mutual Fund to accept the fee and feel comfortable with the risk/reward ratio that goes along with that fund.
- Exchange Traded Funds (ETFs) – Similar to mutual funds, an Exchange Traded Fund gives you access to investing in a large pool of stocks that follow an index. The benefit to them is that you can buy individual shares of the fund without a minimum investment requirement, and they are not actively managed. This also means lower fees so you can capitalize on more profits. Over the long term, Mutual Fund Fees can really eat away at your investment.
- Stocks – Buying and selling individual stocks is another form of investing. When you buy units of stock (called shares in market terminology), you are becoming a part-owner of that company. For example, if I buy 10 shares of a company’s stock, I have 10 units of ownership. Someone that owns 100 shares owns 10x the amount of the company that I own. What makes these enticing is that if you buy stock shares in a company that you believe in and the company does well from year to year, your shares will increase in value and build you a profitable investment. The risk attached comes from the potential decline in value because the company has a bad year or begins to decline in value.
- Bonds – Corporations and Governments issue bonds to raise funds for projects and to help speed up growth. These bonds are issued for a set amount of time (for example, 5 years). At the end of the 5 years, you will receive the money you loaned with a pre-defined interest. Generally considered safer than stocks, there is still the risk that the company defaults and is unable to pay you back your bond.
- Real Estate – If there is one thing that the Earth has a fixed amount of, it’s land. Investing in Real Estate is one of the most popular forms of investing. Purchasing property is a form of investment in real estate. Choosing to purchase REIT (Real Estate Investment Trusts) is another way to invest and is done so in a similar fashion as buying stock shares.
- Precious Metals – This is one of the oldest investments of all time. Societies have gone to war over precious metals such as Gold. The benefit of this type of investment is that it’s physical. You can hold it in your hand. If you want to buy 10 lbs of Gold, you can. If you want to stock a safe in your garage full of silver bars, you can! Precious metals are often used as a hedge investment since they typically gain value when the rest of the economy is down.
How Do I Start Investing?
This is where I have to tell you, DO YOUR HOMEWORK! There are many places to start investing and many things to invest your money in.
I can’t tell you the best place for you to invest your hard-earned money because you may have different investment goals than me. I can say that there are many places to invest and that some are safer than others.
If you want to invest in a mutual fund, choose a company that has been around for a while, and is very established. Tons of websites allow this if you want to buy and trade stocks or bonds. Choose one that feels right for you but be mindful of any fees, minimum deposits, and ease of use. If you want to invest in an Exchange Traded Fund, choose a brokerage with $0 commission fees so your initial investment can go straight to work.
If you want to invest in Real Estate, choosing to purchase property can feel intimidating and daunting. Ensure you do your due diligence and do not rush into a purchase. Choosing to invest in a REIT may be better if you want a more hands-off approach.
How to Start Investing with Little Money
First, ensure you are not investing money that you are going to need right away. I could go on and on about how important it is to invest money that you don’t expect to need for at least 3 to 5 years, but I think I will leave that for a later article.
Ensure you have a separate saving account first that is for emergencies or short term goals. Imagine putting this investment money in a capsule that you can’t open again until a few years or even longer down the road. This will give you a higher chance of realizing a profit and being happy with your results.
Now that you have done that, let’s talk about the best way to get started.
Choose Investments that don’t require a lot of money to get started. There are some sites that you can register for that require NO minimum balance and allow you to trade even the smallest amounts, such as Robinhood and WeBull. These are two investment apps that specialize in trading stocks, and best of all, they are completely free to use.
I personally have money in both of those accounts, but I will say I prefer Webull as an investment app.
In fact, if you join Webull today and deposit as little as $100, Webull will give you four free random stocks. The first two (valued from $2.50 – $250) when you signup, and the second (valued from $8 – $1600) when you deposit the money.
So There You Have It!
Hopefully, you know a little bit to get started with investing. You should know the difference between investing and saving, the different investing types, and how to start investing. Best of all, you should know how to start investing with little money.
I hope this was interesting and not overwhelming.
Let me know in the comments how you are going to start investing! If you have a question, feel free to ask also.
So, let’s start investing!
Eric Baglio has been investing for over ten years and learned a lot of valuable lessons along the way. He has helped numerous people start investing on their own and founded Let’s Start Investing to help anyone willing to learn how to build wealth. His favorite brokerage is Webull and his favorite stock advising service is Motley Fool Stock Advisor.