Investing can be risky but it doesn’t have to be. Dispel fears with knowledge and learn the fundamentals of the market and various types of investments.
Learning how to invest is hard for many people, especially because of the fear of losing money, or if you are the first in your family to invest. However, it is important to learn the fundamentals of the stock market and other types of investments when you are young because you can take advantage of time and compounding to build a strong investment portfolio and to build wealth for yourself.
How to Get Started as a Young Investor
Many young investors are looking for growth. If this is what you’re looking for, you should look into ETFs or index funds, sector funds and individual stocks or growth companies. These investments do not require much to get started, and you can begin investing with as little as $10 or $100!
Think about the tradeoff and begin investing “extra money.” You can start with a Robinhood account, where you can get a free stock to get started! There you can buy ETFs (index and sector ETFs!) and individual stocks, which I’ll explain below.
It might be good for you to start off literally investing $25. What else do you spend $25 on? Probably dinner, a shirt, or shoes. Why not take that $25 and spend it on investing in yourself and your future?
Another thing to think about is making sure you have an emergency fund and your high interest debt paid off before beginning to invest. Here is a helpful graph to let you know which interest is considered “high,”before investing.
ETFs / Index Funds
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, bonds or commodities. A couple of examples are the Dow Jones Industrial Average and S&P 500. The Dow tracks the value of 30 large, publicly owned companies based in the United States and how they have traded in the stock market. The S&P 500 is based on the 500 largest companies in the world. One of the biggest advantages of ETFs is that you have automatic diversification because the fund includes a variety of stocks in many different industries. On top of that, trading ETFs costs very little.
ETFs and index funds both have low expense ratios (meaning they have low fees), but the primary difference is that index funds can be either a mutual fund or an ETF.
People often use “index fund” and “ETF” interchangeably. That’s due to the fact that most ETFs track an index, and when people refer to ETFs, they’re generally referring to index-tracking ETFs. When people talk about index funds, they could be referring to either an ETF or a mutual fund that tracks an index.
Sector funds trade stocks in a specific industry. They also trade just like a stock and provide automatic diversification as it holds a variety of stocks within one industry. If you have a strong portfolio and are looking to diversify a little more, a targeted sector fund it could be a good way to go. It’s particularly advantageous because you can invest in a specific industry that you expect to outperform, without having to research individual companies within the industry. One important note is that you should still research the industry before investing. You can make a large profit if you predict industry trends correctly, but if you’re wrong and the sector goes down, you’ll be losing money. So before investing, research well and be aware that sectors are generally more volatile than broadly based stock funds.
Investing in individual stocks is riskier than ETFs or sector funds because they do not offer any diversification to your portfolio. But, because it is riskier, you could generate much higher returns by investing in individual stocks. If you’re still determined to try this, it is recommended that you try a stock screener. It’s a great way to see which stocks are performing well and which companies are very robust and expected to grow. Doing solid research is important, it is never a good idea to invest without knowing about the company’s future plans. Many investors are not able to make a profit through individual stocks, so only pursue this if you are willing to do your homework.
One tip is to calculate the PEG ratio, or the Price/ Earnings-to-Growth ratio. You can take the stock’s P/E, or price-to-earnings ratio, which you can lookup easily, and divide it by the growth rate of the company’s earnings for a specific time period. It’s recommended that the PEG ratio is below one, which means that the stock is in a good buying range because it is undervalued. It means that the company’s current market value is currently below the company’s projected earnings growth. While the PEG ratio isn’t right in all situations, it can help you get a better picture of a company’s growth.
Also, if you want to work with a financial coach check out Snowball Wealth for financial coaching starting at $9/month.
Disclaimer: The information provided is for informational purposes only, to assist you in managing your own finances and decision-making. Snowball Wealth is not a financial advisor, investment advisor, financial planner, fiduciary, broker, bank or tax advisor. Accordingly, before making any final decisions or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisors who are fully aware of your individual circumstances