Investing is one of the best ways to earn money and build wealth. You could spend a lot of time investing, or it can be a very passive income. Either way, it allows you to take money you already have and put it to work.

Investing for Beginners

If you don’t know anything about investing, it’s important to learn how to start investing and the basics of it first and foremost. A basic knowledge of investing basics will help you determine what the best investments are for you and your portfolio. It is also necessary in order to learn how to invest and to ensure you are taking the best course of action toward a successful portfolio.

The beginner level can range from absolutely no knowledge, to some basic knowledge of general investment principles. It doesn’t matter where you’re starting at this point because I’m going to walk you through the basics. Soon you’ll be able to start researching and making investments.

Investing 101

Investing is the act of putting your money somewhere with the expectation that you’ll get it back and then some. Once you know how to start investing, you can use the money you already have to earn more. Having a job is only one way to earn money. Investing allows you to do it without working. You will work at choosing the right investments, but you won’t be receiving a paycheck like you would with a job.

There are two main types of securities. ‘Security’ is just the technical name for an investment or a negotiable financial instrument. The first is a debt security. Bonds are common debt securities. With this you are lending money with the expectation of getting it back with interest. The second, an equity security, is ownership. When you purchase stock, you are an owner of that company and you are entitled to it’s assets and earnings, albeit only a fraction of the company.

Basically, making an investment means you are using your money in such a way that should earn you money. However, not all investments are successful. Some investments don’t earn money, some earn lots, and others lose money. Investing is not gambling, but there is always the risk you’ll lose money. That is why you must balance your risk.

Types of Investments

There are many different types of investments and ways to invest in them. Some are very complicated and should be reserved for experienced investors, but the complication doesn’t make them better investments. In fact, some of the most successful investors out there continue to stick with basic investments because they work and earn a lot of money. You don’t have to get technical to earn more.

Stocks and bonds are two commonly known investments that most people are familiar with. Stocks are equity investments and bonds are debt investments. Bonds are typically less risky than stocks, but stocks usually earn more. However, these are not hard-and-fast rules. There are definitely bonds that are much riskier than some stocks.

Other types of investments include mutual funds, real estate, commodities, foreign currency, savings accounts, CDs, etc. If you have a friend who is starting a business, giving them some money for start up costs makes you an investor in that company. An action doesn’t have to be tightly categorized in order to be considered an investment. If you’re putting money into something with an expected return, you’re investing.

Don’t mix up gambling with investing. It’s often argued that they are basically the same, but an investment should be safer if more care is taken when choosing it. Gambling is working off chance while investing is putting money in something you believe will give a profitable returned based on your research.

Think of it this way, if you decide to give your friend money toward his business and you know he has several other successful businesses under his belt, he has a lot of experience in the industry he is planning to enter, there is a lot of demand for the business, and there isn’t a lot of competition, you’ll feel confident he’ll succeed and you’ll make money. You won’t know for sure if you will both make money, and you could lose money, but the background and force is in your favor.

On the other hand, if your money is depending on the role of dice, you can’t have the same confidence. You could win on the gamble, and your friend’s business could go under, but there is less risk than the other.

Finding the Best Investments

There isn’t a best investment for beginners in general. Some types of investments may be better than others for beginners because they are easier to understand, but it’s impossible to tell you exactly where to put your money in order to profit. This goes back to risk and the unpredictability of investments.

Riskless investments are guaranteed. There are no true riskless investments. The closest you can get is government bonds or government insured savings accounts that give a rate of return. Risky investments are those that have a high likelihood of defaulting.

More risk increases your chances both ways. You have a higher chance of making a lot of money and a higher chance of making nothing or losing money. Some of the riskiest investments include junk bonds (bonds with a very low rating), penny stocks, etc. These can either go under or earn a lot of money. Government bonds are probably the least risky, but you’ll also earn a much lower return.

When investing money for beginners, it’s important to find a balance. In fact, all investors need to find the right balance. For example, older investors that are close to retirement or who are already retired should have the least amount of risk among investors to prevent losing their nest egg which is supporting them now or very soon. Younger investors that are years away from retirement have lots of time to earn back losses and can afford to shoot for more earnings.

Choices

Whether you choose to invest in stocks, bonds or other investments, you need to know how to choose investments. You could just invest in whatever companies you’ve purchased from, but it’s important to do your research and analysis, too.

There are two main types of investment analysis: fundamental analysis and technical analysis. Being able to do both is a good skill to have, but you can choose between one or the other.

It is often recommended to stick with fundamental analysis if your a beginner just starting out and if you plan on doing long term investing, often referred to as the ‘buy and hold’ method because you hold onto stocks for a long period of time. Fundamental analysis involves reading annual reports, calculating and analyzing ratios, and understanding the company as a whole.

Let’s go back to our example of investing in a friend’s business. If you know all about your friends background, how well they know the industry, and what they have planned, you’ve done your fundamental analysis.

Technical analysis is more often used by short term traders but can be used by any investor. It can also be used in conjunction with fundamental analysis. This process analyzes past price and market data and charts to try to determine where the price will go in the future. Traders often only use charts to make an educated guess where the price will go next. They use trends made from other stock prices in the past.

How to Start Investing

Once you’ve learned, researched and decided which investments you want, what do you have to do to get started? This depends largely on what type of investments you make, but usually you’ll need an investment broker through a brokerage firm.

A broker will help you purchase stock, foreign currency, or other commodities. They can also help you buy bonds. Once you set up an account, you will pay trading commission fees when you buy or sell securities in order to acquire the investments you want.

For buying stocks, mutual funds and other similar investments, I recommend investing with Sharebuilder. I’ve been with them for 3 years and I’ve had very good experiences with them. You can learn more about Sharebuilder here. For reviews on my brokers, you can see my top recommendations for brokerage firms here.

There are other investments you can purchase more easily. For example, if you want to buy government bonds, you can go to TreasuryDirect.gov or go to your bank and fill out an order form. Savings accounts, CDs and money market accounts can also be invested in through your bank.

I use ING Direct for my savings account and CDs because they offer much higher rates than regular banks. Plus, it’s convenient to do online. I’ve been with them for 5 years and I’ve never had a problem. You can set up an ING Savings account or invest in ING CDs here.

Practice Investing First

Before you invest your money, it’s a great idea to practice investing first without real money. I did this in college for a few classes and it really helped me better understand how the stock market works.

If you plan to buy bonds, especially government bonds, there really is no reason to wait. You can see up front what amount of money you will earn. However, the stock market is very unpredictable, and it’s a great idea to test it out first to get a hang of it.

I use Wall Street Survivor as a trading game platform. You can trade stocks using real market data without using any real money. It’s also a great practice tool to use if you’re planning to trade stocks actively, and you can win prizes.

Sign up for Wall Street Survivor here, or learn more about it here. It is completely free to get started and play.

Keep Learing

Whether you just need to clear up a few things or you’re still completely confused, I highly recommend picking up the following books to help you continue to learn about investing. They are clear, concise and geared toward beginners: