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3. Know your investment options
We've thrown around a lot of terms — stocks, bonds, mutual funds, etc. So, let's go over some definitions for common ways to invest.
Savings account. A savings account is the most basic financial investment, which allows you to store money securely while earning interest. The annual percentage yield, or the real rate of return earned on an investment, reaches 0.50% on some accounts. A savings account allows for you to differentiate your everyday spending money kept in a checking account, from money that is meant to be used at a later date. This type of account is federally insured up to $250,000, so you won't lose your money if the bank fails. You would typically do this at a bank. Could be the same bank you have your checking account with, but some people prefer to put their savings at a different bank. Choosing a different bank might make sense for you because you can shop around for the best rates. (i.e., that will make you more money.)
Certificates of deposit (CDs). This type of account is similar to a savings account but with a fixed time period and a higher fixed interest rate (more money). So, the catch is that it locks you in for a certain time period where you can't touch that money or else you will face a penalty (fee). So, it's a great way to make more money than a typical savings account, but you want to make sure it's money you won't need for anything so that you can drop it there until the time period — two years, three years, whatever — is up.
Money-market funds. Money-market funds generate income but are considered extremely-low risk, which means they also don't generate a high rate of return. But they are a safe option, letting your money grow little by little. So, financial advisors will often recommend keeping a certain amount of your portfolio in a money-market fund for security but not too much. If you know you have $500 to invest, maybe you park it there first, then start moving it into other investment options.
Stocks. When you buy a stock, you are essentially purchasing one piece of one company. The shareholder is entitled to own portions of the corporation's assets and profits depending on how much of the stock they own. Most stocks are bought and sold on exchanges such as the Nasdaq or the New York Stock Exchange. But you can purchase them through an app or a broker.
Bonds. In the simplest terms, a bond is a loan from an investor to a borrower such as a certain company. The company uses the money you "lent it" to fund its necessities. Meanwhile, the investor receives interest on the investment. Bonds are a key ingredient to having a balanced portfolio as it can help soften the blow if the stock markets plummet.
Mutual funds. Mutual funds bring together investments from many people and invest that money in stocks, bonds and other assets. The specific stocks, bonds and assets the money is invested in are known as the "portfolio." The criteria for what goes in the portfolio can be anything from a sector (such as technology or health care) to a risk level (growth vs. value) or a target date (such as 2030). Mutual funds are managed by a money manager who selects and changes the assets in the portfolio to try to maximize profits for their investors. Since there is an expert involved in managing the investments, there are fees involved.
Exchange Traded Fund. ETFs are similar to mutual funds in that they are a collection of assets, but they are designed to track a particular index, sector, commodity or other asset. So, you might have an ETF that tracks corporate bonds or real estate.
Bombardiere recommends students invest in low-cost well diversified ETFs as it allows them to have access to hundreds of stocks, without having to personally research each one of them.
Index Funds. An index fund is also a collection of assets, but they are pegged to a specific index such as the S&P 500 or Nasdaq. One of the perks of index funds is that they tend to be lower in cost because they don't have an expert taking the time to pick stocks or bonds for funds.
Han recommends students invest in index funds because "you put some money in it, can set up automatic recurring purchases and have dividends automatically reinvested on their own."
Minimums to Open an Account
Many financial institutions have minimum deposit requirements. In other words, they won’t accept your account application unless you deposit a certain amount of money. Some firms won’t even allow you to open an account with a sum as small as $1,000.
It pays to shop around some and check out our broker reviews before deciding where you want to open an account. We list minimum deposits at the top of each review. Some firms do not require minimum deposits. Others may often reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold. Still others may offer a certain number of commission-free trades for opening an account.
3. Trade commodities
Trading commodities like gold and silver present a rare opportunity, especially when they’re trading at the lower end of their five-year range. Metrics like that give a strong indication on where commodities might be heading. Carolyn Boroden of Fibonacci Queen says, “I have long-term support and timing in the silver markets because silver is a solid hedge on inflation. Plus, commodities like silver are tangible assets that people can hold onto.”
The fundamentals of economics drives the price of commodities. As supply dips, demand increases and prices rise. Any disruption to a supply chain has a severe impact on prices. For example, a health scare to livestock can significantly alter prices as scarcity reins free. However, livestock and meat are just one form of commodities.
Metals, energy and agriculture are other types of commodities. To invest, you can use an exchange like the London Metal Exchange or the Chicago Mercantile Exchange, as well as many others. Often, investing in commodities means investing in futures contracts. Effectively, that’s a pre-arranged agreement to buy a specific quantity at a specific price in the future. These are leveraged contracts, providing both big upside and a potential for large downside, so exercise caution.
Earn Compound Interest
The main reason the stock market has been such a tremendous wealth generator is the effect of compound interest. While you can make short-term profits in the stock market, it’s actually a safer bet to leave your money in the market for the long term and let compound interest do its magic. For starters, the longer you leave your money in the market, the less risk you actually take. While no one can predict what the market will do from year to year, the S&P 500 index has actually never lost money over any 20-year rolling period. That’s an amazing statistic when you think about how volatile the market can be over the short run. If you can keep your money in the market for 10, 20 or even 30 years, your potential to build wealth is tremendous. Think about it this way: If you put $10,000 in the market and earn 10% per year, taking out your profits each year, you’ll have a net profit of $30,000 after 30 years, or three times your money. But if you instead let that money compound every year at 10%, you’ll end up with just under $200,000, or 20 times your money. This may not be the answer that those looking for a quick buck want to hear, but the best, safest way to generate real wealth in the stock market is to stay in it. More From GOBankingRates 2022 Stimulus Checks: Is Your State Giving Out Money This Year?Nominate Your Favorite Small Business To Be Featured in GOBankingRates’ 2022 Small Business SpotlightWhat To Do With Your Money During High Inflation17 Biggest Budgeting Mistakes You’re Making
Stocks in public companies are registered with the SEC and in most cases, public companies are required to file reports to the SEC quarterly and annually. Annual reports include financial statements that have been audited by an independent audit firm. Information on public companies can be found on the SEC’s EDGAR system.
If you’re a nimble and proficient trader, probably the “easiest” way to make fast money in the stock market is to become a day trader. A day trader moves in and out of a stock rapidly within a single day, sometimes making multiple transactions in the same security on the same day. For investors with a good understanding of market trends and the ability to anticipate or decipher financial results of particular companies, money can be made in day trading. However, the average day trading investor typically loses money. In fact, anecdotal estimates suggest up to 95% of day traders lose money — and, even worse, they continue day trading. There is definitely money to be made as a day trader, but generally it’s best left to the professionals.
6. Trade options
When it comes to options, Tom Sosnoff at Tastyworks says, “Trade small and trade often.” What type should you trade? There are loads of vehicles, such as FOREX and stocks. The best way to make money by investing when it comes to options is to jump in at around 15 days before corporate earnings are released. What type should you buy? Money calls.
The optimal time to sell those money calls is the day before the company releases its earnings. There’s just so much excitement and anticipation around earnings that it typically drives up the price, giving you a consistent winner. But don’t hold through the earnings. That’s a gamble you don’t want to take if you’re not a seasoned investor, says John Carter from Simpler Trading.
Use Market Data to Guide Your Decisions
Market data refers to the price, bid/ask quotes, dividend per share (if applicable), market volume, and other market information. There is historical data as well as real-time data.
Whether you are more of a fundamental or analytical investor, this data is valuable. Data-driven decisions prevent impulsive and emotional purchases.
You can find some of these data points within your stock trading platform or on stock and investment websites.
Additionally, commonly-available information to you in most online brokerage accounts will show you the current share price, the 52-week range, market capitalization, volume, and more.
What Strategy Is Best for You?
Which strategy is best for you as an owner depends entirely on the rate of return management can earn by reinvesting your money. Sometimes, paying out cash dividends is a mistake because those funds could be reinvested into the company and contribute to a higher growth rate, which would increase the value of your stock.
Other times, the company is an old, established brand that can continue to grow without significant reinvestment in expansion. In these cases, the company is more likely to use its profit to pay dividends to shareholders.
Valuable investments can choose any of these paths. Berkshire Hathaway, for example, pays out no cash dividends, while U.S. Bancorp has resolved to return more than 80% of capital to shareholders in the form of dividends and stock buybacks each year. Despite these differences, they both have the potential to be attractive holdings at the right price.
The best way to determine whether a stock is a good investment is to look at the company's asset placement and understand how it manages its money.
3. Reinvest Your Dividends
Many businesses pay their shareholders a dividend—a periodic payment based on their earnings.
While the small amounts you get paid in dividends may seem negligible, especially when you first start investing, they’re responsible for a large portion of the stock market’s historic growth. From September 1921 through September 2021, the S&P 500 saw average annual returns of 6.7%. When dividends were reinvested, however, that percentage jumped to almost 11%! That’s because each dividend you reinvest buys you more shares, which helps your earnings compound even faster.
That enhanced compounding is why many financial advisors recommend long-term investors reinvest their dividends rather than spending them when they receive the payments. Most brokerage companies give you the option to reinvest your dividend automatically by signing up for a dividend reinvestment program, or DRIP.
5. Continue investing
Here's one of the biggest secrets of investing, courtesy of the Oracle of Omaha himself, Warren Buffett. You do not need to do extraordinary things to get extraordinary results. (Note: Warren Buffett is not only the most successful long-term investor of all time, but also one of the best sources of wisdom for your investment strategy.)
The most surefire way to make money in the stock market is to buy shares of great businesses at reasonable prices and hold on to the shares for as long as the businesses remain great (or until you need the money). If you do this, you'll experience some volatility along the way, but over time you'll produce excellent investment returns.
The Bottom Line
It is possible to invest if you are just starting out with a small amount of money. It’s more complicated than just selecting the right investment (a feat that is difficult enough in itself), and you have to be aware of the restrictions that you face as a new investor.
You’ll have to do your homework to find the minimum deposit requirements and then compare the commissions to those of other brokers. Chances are that you won’t be able to cost-effectively buy individual stocks and still diversify with a small amount of money. You will also need to choose the broker with which you would like to open an account.