You’re never too young to invest. Starting early to invest in stocks is a major advantage.
In your 20s, and even your 30s, your biggest investment asset is time. Even when you’re just investing in retirement savings, nothing can make up for the effect of compound interest. Also, if you lose money in the market, you’ll have more time to make it back before you need it.
Your savings account isn’t invested in anything …
You do earn interest on money in savings, but it’s usually less than 1%, and that money sits in the bank. If you’re looking for a better place to keep your cash, high-yield savings accounts pay more like 4% to 5%, but note that rates fluctuate over time.
… but your retirement savings are.
Retirement savings, on the other hand, are invested if you put them in a retirement plan like an IRA or 401(k). This isn’t the case if you simply name your savings account “retirement.”
Investments are one of the only ways to keep up with inflation.
Inflation lopped an average of 3.1% off your money’s value in 2023, so you need your money to grow fast enough to outpace inflation. For most people, investing is the only way to get that kind of growth.
Investing is always a risk.
Investing could earn you money or lose it. Investments typically aren’t FDIC-insured like a bank account, meaning there’s the potential to lose money for good.
A security is a financial instrument.
You’ll probably hear people refer to “securities,” which is a catch-all term for things like stocks, bonds, or CDs. Securities are divided into debt securities (money owed to us, like from a government bond), and equity securities (actual value we own, like stocks).
Stocks are equity in a company.
When you buy a stock, you’re buying a tiny little piece of an actual company. Not a lot, but ownership nonetheless. Stocks are more volatile than bonds, and may therefore yield greater rewards or losses.
The stock market lets you track stock performance.
Stocks are traded on “exchanges,” which make up the overall market. The major stock exchanges in the US include the New York Stock Exchange (NYSE) and the Nasdaq. Stock prices are also tracked on indices such as the S&P 500 and the Dow Jones Industrial Average. While you’ll want to check in with your individual investments, monitoring stock market activity can give you an idea of how your portfolio might be performing.
Bonds are loans you make.
When you purchase a bond, you’re essentially loaning a little money to an entity — like the US government, for instance — and that entity has to pay you back after a fixed period of time, with interest. There aren’t bond exchanges that show up in a ticker, because bonds are traded differently than stocks. However, there are sites where you can get an idea of bond pricing, like Markets Insider.
Diversification means spreading your money out among different kinds of investments.
There are a lot of opinions out there about how diversified an investment portfolio needs to be, but most everyone agrees that putting all of your financial eggs in one basket is a recipe for disaster.
The ROI is how much money you make on your investments.
To get an idea of how well your investments are performing, you can calculate the ROI by dividing an investment’s gains by its costs.
You’ll be charged fees.
Investing isn’t free. If you’re working with an investment professional, you’ll pay them either a percentage of your portfolio or a flat fee (you’ll want to know if your advisor is “fee-based” or “fee-only” before you sign on), online investment platforms or “robo-advisors” each have their own fee structures, and some mutual funds and ETFs also charge fees. These fees vary, and if you do your research, you can minimize them.
No one can or has ever reliably predict or forecast the stock market.
Pundits and friends just can’t. While professionals can make educated guesses, predicting the market is predicting the future, and no one can do it.
And past market behavior isn’t a reliable way to predict the future.
On that same note, looking at what the markets have done isn’t a reliable way to predict what they will do. Again, this is a case of predicting the future, which could go in an unexpected direction due to unforeseen events known as “black swans.”
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