Investing 101

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PUBLISHED JUN 3, 2018

The Story

Investing can seem scary and complicated. But it doesn’t have to be. Trust.


Female millennail Skimm'rs' top barriers to investing

Where do I start?

First things first: you’ll want to come up with a plan. Ask yourself some questions like: How much money do I want to invest? What are my goals? This all depends on your own financial situation.Next, you want to look at options, like...

Mutual Funds: Instead of trying to pick your own stocks and time the market, you can hire a human to pick a bunch for you. Mutual funds consist of many stocks, bonds, or both. They’re professionally managed by investment firms. Sometimes they’re focused on a specific category of company, other times the firm tries to pick the companies they believe will perform the best. You may see mutual funds as investment options in your 401(k) at your job. But you can also buy into mutual funds on your own.

ETFs: Similar to mutual funds, ETFs (or Exchange-Traded Funds) are made up of a variety of things – like stocks or bonds. Most ETFs today are set up to focus on a specific category of companies, such as the 500 largest US stocks (you may have heard of a little thing called the S&P 500 index) or 85% of the companies in developed countries around the world (the MSCI World Index). They typically have lower costs than other investments because they usually don’t require a professional to be as hands-on. They also typically have no or low minimum investment amounts, so you can get started asap.

Bonds: Also known as “fixed income.” One way for a company or the gov to raise money. Basically, bond holders lend money to investors, who in turn receive a fixed amount of interest. Oh and they get their initial investment paid back at the end of the loan...unless the company fails. The interest and level of risk of a bond depends on the issuer, which can range from a large corporation to a small town gov.

What about stocks?

Stocks are when you own a really tiny part of a company. Owning stock gives you the right to participate in company earnings (and losses) through dividends and/or changes in market price. If you wanna go balls to the (stock market) walls, here’s more…

Dow Jones Industrial Average: The Dow Jones Industrial Average (aka the DJIA, “Dow Jones,” and “the Dow”) is the best-known stock index in the U.S. It’s really just a list of 30 big-name stocks traded on either the New York Stock Exchange or the NASDAQ. The index changes as companies wax and wane. Currently, the list includes Apple, McDonalds, Nike, and Visa. It’s also price-weighted, meaning that stocks with higher prices are given more importance when calculating the overall average.

NASDAQ: When someone says, “The NASDAQ,” they’re most likely referring to the NASDAQ Composite. The NASDAQ Composite is an index that contains every stock—over 3,000, including Amazon, Facebook, and Google—listed on the Nasdaq stock market. Because a lot of tech firms trade on the NASDAQ, the index is widely viewed as a go-to temperature check of the financial health of tech and growth companies. Looking at you, Silicon Valley.

What else should I know?

Here are a few other things...

Broker-dealer: “B-D”s for short. You’ll need one of these to help you buy or sell publicly traded stocks, bonds, or other common investments.

Fiduciary: An investment advisor that’s registered with a government entity (like a state agency or the SEC). They’re obligated to act in their clients’ best interests, rather than their own. This includes things like disclosing conflicts of interest (like how and when they get compensated for selling certain products).

Hedge fund: The country clubs of investing. You have to have a lot of money to get in, and they’re really expensive to stay in. These funds use a ton of pooled money to invest in different kinds of investment strategies, many of which involve higher risk.

Any advice?

Yup. Here are some general tips to make sure you’re doing things right…

Make it a Habit: Don’t think you have enough money to invest? Start small and make it a habit, just a little out of every paycheck. Then when you get that raise, you can increase the amount.

Diversify: Typically the sweet spot is a low-cost, well-diversified investment portfolio. Because you don't want all your eggs in one basket.

Keep Costs Low: When you start investing with a broker-dealer or an investment advisor, they will most likely charge a fee for their service. And there may be other hidden fees tacked on to what you buy, so don’t be afraid to ask how much you’ll be charged.

Look for a Fiduciary: There are a number of “advisors” out there. Learn the difference. That way you can make the most informed choice.

Balance Risk & Time: When you’re young, you may be able to afford being more aggressive with your retirement portfolio because if something goes wrong with the markets, you may have time to make up for losses before you retire. You can get more conservative as you go.


theSkimm

Investing can sometimes be a great way to make some money. Do your research. And choose what’s right for you.

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