Investing: 5Star InfoBarrel Guide to Markets
Make Money with Capital Appreciation and Fixed Income Payments
Even now, in the 21st century, there are still a great many people that simply do not understand very much about how to invest their money. This guide will provide a number of basics about the principles of investing that can help to educate a new investor about potential avenues for profit and potential land mines of loss.
The wonderful thing about the world that we live in is that it is very easy for anyone to invest in just about anything. There are a couple of reasons for this. The first is that fierce competition among internet brokers have brought commissions down to unprecendented levels. On many sites today a person can buy $100,000 of investment product (stocks, mutual funds, exchange traded funds) and only pay a few dollars in commissions. It was only 20 years ago that such a transaction would cost thousands in commissions to a stock broker.
The other reason it has become so easy to invest in through the invention and mass popularization of ETFs or exchange traded funds. ETFs are like a mutual fund in that they are a grouping that you can buy by only making one transaction. For example, a popular ETF that tracks the S&P 500 allows you to own a piece of all 500 companies (stocks) that make up that index. But you only have to one security, the ETF, rather than owning 500 securities, the stocks of each of the companies.
In the past decade, ETF offerings have become much more expansive and much more intricate. Today, if you want to invest in real estate, you don't have to have hundreds of thousands of dollars to buy a property, you can invest in an ETF that owns real estate stocks, such as home builders. Or you can purchase shares of a real estate trust (REIT) an entity that owns and profits from real estate.
Because of the vast expanse of offerings, between ETFs, stocks, bonds, and mutual funds, you can own and invest in just about anything imaginable. As you get more experience, you will be able to expand out and purchase options or futures to add even another layer of complexity to your investing.
But, at first, the only thing that you need to know is that every person that is responsible for money, so nearly every person, should understand the stock market and how to make money in it. There are, literally, thousands and thousands of strategies to make money by investing. For most people, learning the basics plus a couple of tricks will allow you to become a very successful investor.
The most important thing to realize is that time is one of your great allies in the world of investing. Therefore, the sooner that you start saving and investing your money, the longer your money can work for you. The reason for this is compound interest, something Albert Einstein is rumored to have said is the most powerful force in the galaxy.
All compound interest means is that each year, the money you made last year is added to your pot that generates a return. Here's an example:
Let's say you invest $10,000 and get an annual return of 50% (which is very high, this is just an example). Here's how your money would compound over the years.
$10,000 +$5,000 (interest) = $15,000
$15,000 + $7,500 (interest) = $22,500
$22,500 + $12,225 (interest) = $34,725
$34,725 + $17,362.50 (interest) = $52087.5
52087.5 + $26043.75 (interest) = $78131.25
The Power of Compounding
As you can see from this short demonstration, in just 5 years your $10,000 will become more than $78,000 due to the powers of compound interest.
This Guide will, in time, link to other InfoBarrel pages which provide more detailed information on various investing strategies depending upon your goals and time horizon. If you are currently an investor, perhaps this Guide will help sharpen your skills. And, if you have been sitting on the sideline, I think that this guide will convince you that investing is not that difficult once you get the hang of it.