Get Yourself FinLit

The Beginners Guide to Investing

Investing may sound like some Wolf of Wall Street thing that’s only for rich men in suits who smoke cigars, but it’s really not. Investing is just a broad term for managing money in a way that aims to make a profit. To invest is to put money into something offering a potential profit. At its safest, investing isn’t much different from a savings account. At the more complex end, investing is buying expensive, high-risk stocks and trying to predict the best time to sell them for more than you purchased them for.

If you’ve got some money stashed away that you think you might want to invest now or in the future, keep reading.

When Am I Ready To Invest?

Generally, people don’t start investing until they’ve saved a decent chunk of money. Some experts suggest that you should first save about six months of wages in your savings account as an emergency fund, then only start investing with funds on top of that. You can read more on whether you’re ready to invest here.

Should I Get A Financial Advisor?

Getting yourself a financial advisor is an option and they can provide some good advice for your financial situation. Different financial advisors charge different amounts, so it can be worth shopping if an advisor is the way you want to go.

However, an alternative is to do your own research to figure out the type of investments that best suit them. It’s also worth asking for advice from friends, relatives and mentors who have experience with investments, but ultimately, the final decisions are up to you.

Types of Investments

The four main types of investments are cash (as in savings accounts), bonds, shares and stocks, and property.

    Cash: When you put your money into a savings accounts, you are effectively allowing the bank to invest your money for you, so you can collect a decent amount of interest on your cash. You can read more about savings accounts here.
    Shares and stocks: When you buy a stock, you buy a “share”, which is a slice of a company. At this point, you become a shareholder, which means that if the company is successful and making money, then you make money too. Conversely, if the company makes a loss, you make a loss.

    A company may distribute its profits to shareholders based on their percentage ownership. These are called dividends, but not all people buy stocks for the dividends. Some investors buy stocks at a certain price, hoping that later on, when the company is more profitable, they will be able to sell those stocks for more than they bought them for.

    Some companies’ stocks are less risky than others. Less risky stocks are typically in companies that are well established and grow their value slowly but surely. They’re safer because even when they report losses, it’s more likely that they’ll go back up eventually. Companies that grow rapidly have faster growing profits and therefore higher returns but they’re also at risk of rapidly losing value if the outlook for profits changes.

    Bonds: A bond is basically a loan. When you buy a bond, you basically loan money to a government or company and they pay you back with interest. Bonds are usually considered low risk because you can choose the length and term of the bond and calculate exactly how much money you’ll get back and when (assuming these are investment grade Australian bonds). The main risk is if the money is lent to someone who fails to pay it back. Generally speaking, while bonds are considered safer, they have less potential for profit (and loss) than shares.

    Property: The last option is to invest in property, be that a home or block of land. Many people prefer to put their money into property as it is a tangible investment that you can see and touch. You can read all about property investment here.

How to Get Started

If you’re keen to get involved in investing in shares, you’re going to need a stockbroker. You can either find one online, which is usually cheaper, or go through a full-service stockbroker, which is more expensive. An online stockbroker won’t usually provide you with recommendations regarding which shares you should buy. A full-service stockbroker, however, will help with personal recommendations and will talk you through the current market and hold your hand through the process of buying and selling. Ultimately, however, the risk in investing your money lies with you.

This information is intended to be general in nature only and might not apply to your financial circumstances. When in doubt always seek professional guidance.
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