Did you know that investing is the single most important thing you can do to have a safe financial future? The sooner you start, the better the chances of becoming rich, or at least financially stable.
I know, this might sound unrealistic, but there are more than 100 years of evidence from stock markets that confirms this statement.
And still, people don’t have the right idea about investing. A lot of people seem to think you can magically get rich with stocks and bonds quickly.
From our experience most people get wrong about investing is either:
- a 24-hour Wall Street mania where nervous traders make and lose millions while always yelling “BUY!! BUY!!” into a phone.
- Investments are incredibly risky because the pundits always euphorically scream about the next financial apocalypse, whenever there is a dip in the market.
And you actually have many reasons to believe this.
Because of Hollywood and the sensational pundits on the news, we have come to believe that investing in stocks or bonds is something not suitable for an ordinary person.
And still, many of us don’t even know how investing works. This is the reason why we decided to create this guide, to reveal the truth about some of the myths about investing. We will also focus on some of the most common topics you will come across when the investments are discussed:
- How do Bonds work?
- Stock Basics
- How to invest in your future – without bullshit.
The article is not going to be about the hottest stocks or bonds in the market. If you are looking for something like that, we recommend you go on youtube, or listen to some cable news pundits. Instead, we will highlight the basics of stocks and bonds and how you can use them to achieve financial freedom.
How do Bonds Work?
Bonds are essentially a loan you give to the bank getting a fixed amount of interest in return.
We will talk about:
- Bond Basics
- Bond Positives
- Bond Negatives
Bonds, in a nutshell, look like this:
You decide to buy a 1-year bond, and you agree to give $100 to a bank, and at the end of the year, you will get $102. The current rate for a 2-year bond is at around 2%.
With Bonds you can expect:
- a guaranteed return
- a smaller size of returns
- they are very stable
So, who should invest in bonds, knowing these facts?
Basically, anyone, who wants to know the exact amount of returns they’ll be getting. It doesn’t matter if you are old or young, if you prefer stable investments with guaranteed returns, buying bonds is the right choice for you.
Not all people like the risk and volatility of a stock market and this is perfectly fine.
- You know exactly how much return you will get when buying a bond
- You can choose the time period you want a bond for – it can be a year, 2 years, 5 years and so on..)
- Longer time periods have higher returns
- Bonds are very stable, government bonds even more so. The situation where you’d lose money on a government bond is if the government defaulted on its loans. However, this doesn’t happen – the government just prints more money.
- As they are very stable, the returns on a great bond are much smaller than on a great stock.
- When investing in bonds your money is illiquid, meaning you can’t withdraw your assets fort he period of time unless you pay a substantial penalty for taking it out early.
- Bonds are hard to buy and sell as individuals as opposed to stocks.
What does it mean to own a stock?
When you own a company’s stock you essentially own a part of that company. This is also the reason why stocks are also called equity.
With stocks we will focus on:
- Stock basics
- How to pick the right stock
- Research resources
- Stock positives and negatives
As the stock means ownership in the company, if the company does well, so does your stock. You can buy and sell stocks at any time using a broker or a website such as TD Ameritrade or E*Trade.
When learning about stocks a lot of people start thinking about questions like:
“What stock should I pick?”
“Is this company a good investment?”
“Is the stock price too expensive?”
But first things first: take it slowly.
This is very important. Before you make any sort of investment, you should also understand how to make the correct decision – what stock to buy.
Furthermore, it is also crucial to be self-aware and not spend too much money on stocks. They are still volatile, and if you will risk too much, you will stress out more and the likelihood of making a bad decision and selling the stocks at the wrong time will be increased.
How to pick the right stock
The easiest way to narrow down your stock options is to think about companies you already know.
Think about some of the companies you use in your everyday life and write down 15 of them.
Think about everything you do:
- Food: Wendy’s, Whole Foods, Subway
- Clothes: GymShark, Zara, Etsy
- Services: Amazon, AT&T
- Technology: Microsoft, Apple, Samsung
- Entertainment: Disney, Netflix, Warner Brothers
- Transportation: BMW, Nissan, Uber
Now instead of looking at all the possible options, you can make your pick out of the 15 companies you chose.
Keep in mind – a good company doesn’t always translate to good stock. Before you start trading a stock you should make a deeper analysis. Don’t just buy the stock because you like the company or it has good service! It is also recommendable to first read a guide about how to invest in the stock market with success.
Before buying a stock you should look at 5 different stock aspects:
- Trends: Are company sales increasing or decreasing? Also check the sales from 2 years, 5 years ago, etc..
- Management: How would you rate their management? Is turnover good? What is the management’s philosophy, execution abilities?
- Products: How is the future looking for upcoming products? Did you hear any news in that regard?
- Insider trading: Are the company’s executives buying or selling company stocks?
- Revenues/profits/growth/earning per share: This is the juiciest part to consider before buying a stock. It might seem intimidating at first, but there are many websites that can guide you through it.
You can find all of the information online for free. You should research the company as much as possible. If you find any doubts about any of the company aspects, you should avoid buying their stock.
How To Pick The Right Stock Broker?
There are several different stock brokers on the market and its sometimes hard to find the right option for your trading style. We have recently done a comparison between the most common brokers and created a list of the best stock brokers for united arab emirates. Make sure you check those before you sign up with any one of those.
Here are some of the best websites you can rely on when buying a stock:
- Investopedia: This is the ultimate website for any beginner looking to learn more about investment.
- Yahoo Finance: Here you can check all the standard information about any stock.
- The Motley Fool: This is an awesome place for first-time investors. In the beginning, all of the charts and information will be really confusing. However, the more you use them, the more comfortable you will feel. You will also understand more and more about investing.
- You can earn some nice profits if your stock turns out to be good. IF your stock is great, then you can earn even more. (Understanding the industry is a huge advantage as you can buy a stock that can beat the market.)
- Your money is liquid – you can withdraw it at any time you want by selling your stock
- When the company has problems, your stock value will drop. Your stock isn’t diversified by itself – this means that you could lose a lot of money if your pick is doing badly. Keep in mind, you can still lower your risks by choosing bigger, more stable companies.
Your investment future without the bullshit
When you decide what to invest in, be it bonds or stocks, both are a good choice as long as you take your time and do the necessary research.
So here is our advice: when it comes to investments, every investor should go for low-cost diversified index funds.
Okay, let us show you an example:
Imagine that you are 25 years old and you invest in a low-cost diversified index fund. If you invest $500 a month and do that until you are 60 years old, how much money would you have?
Here it is:
Yes, you read it right, you would be a millionaire. All it takes is investing a couple of thousand dollars a year. There is no magic secret behind it. Just patience and consistency.
The two methods of investing your many are pretty straightforward:
- 401k: Use your employer’s 401k plan – put at least the amount of money your employer has to match. Think about it, for every dollar you invest, your employer will put an extra dollar with it. It is basically free money! Taking advantage of the 401k is incredibly efficient, you can DOUBLE your invested money over the course of your employment.
- Roth IRA: SImilarly to 401k – you want to use the full potential of this opportunity. The amount you can contribute gradually increases. Right now you can contribute up to $5.500 per year.
Extra tip: If you think $500 a month isn’t affordable, check the ways you can get it with just a couple of phone calls.
If you are only starting out, we are super excited for you – you came to the right place!
Our team has worked really hard on something that we believe will help you immensely on your way into the investing world: The Ultimate Guide to Personal Finance.
In it you can learn about:
- Everything you need to know about 401k: take advantage of the free money offered to you by your company, you might get rich while you do it!
- Roth IRA’s management: How to save for your retirement with a long-term investment.
- Expenses automation: Use the wonderful automation investment method, and make your investment life easy!