Investment Basics For Beginners

Most new investors have relatively no idea how to invest money, in large part due to lack of knowing the basics of investing. In other words, without having the basic knowledge of where to put their money and why, they won’t be able to properly choose an investment strategy that suits their needs.

Everyone is different, for example investors far from retirement often choose riskier holdings, heavily weighted in stocks for example; while those looking to retire soon may want to keep their funds in safer markets.If you don’t know where you stand, and what your goals are, how could you ask the right questions when sitting down with your financial advisor or broker?  The solution is simple, learn the basics.

4 Investment Basics Everyone Should Know

Liquidity – How fast can I sell this investment if I need the money? Will there be fees, penalties or other costs associated with cashing in early? You don’t want to lock all of your investment up for the long term, what if you need access to some of that money within the next few months?

Safety- Assess the safety of your investment. Will the value radically fluctuate with the market? This is probably the most important question to answer, but it depends on your goals. As mentioned earlier, investors with a long time until retirement are safer taking the high risks associated with riskier investments. CD’s and most bonds, for example, are considered very safe for those nearing retirement.

Growth – What kind of returns will your investment return, when compared to money in the bank. Growth is necessary while you’re accumulating money for retirement – but again this is usually offset by safety. Higher growth returns are usually a trade-off for higher risk. It’s also necessary to stay ahead of inflation. Stocks, for example, are great growth investments but there is relatively little safety here – especially in the short term.

Taxes – Some investments and accounts may offer tax advantages, but this can get tricky. Things like IRA, 401(k) and municipal bonds can offer appealing tax breaks, but how you invest and withdraw funds can affect your financials and tax liabilities. Pulling your money out of a 401(k) early, for example, may subject you to taxes and penalties.

As you can see, there isn’t much to knowing the basics. Consider these four points when asking your financial adviser for advice. Remember, there is no perfect investment and if it were easy then there wouldn’t be money in it. No growth investment will be 100% safe, and there are no guarantees in this business. Balance the trade-offs of risk versus reward, and try to find the strategy that’s right for you.