In modern times, when the cost of living and the average income are not equal, people turn to other methods to generate cash, and some of these methods can lead to a lot of money. For some they may work multiple jobs, for others they may choose to supplement their day job with a side hustle, others will take their bankrolls and head to the casino or play the lottery in hope that can get lucky and one day this spare cash will land them a windfall.
However, the most popular way to increase your cashflow is to invest. Investing has really taken off since more and more people got accustomed to how the stock market works. But stocks are not the only way to invest, and if you have some idle bucks lying around, you could really turn a profit with enough skill and patience in multiple different ways, with many investment types. The best news is, it doesn’t really matter what your income is, anyone can invest with any amount of money! Investing is for everyone.
So, what is investing, how does it work, and what different ways are there to invest. Today we will take the time to talk to you about all this and more.
What is Investing?
Investing is when you buy assets that increase in value over time, and then provide returns, in the form of income payments or capital gains. An investment that most people will typically make in their lifetime is to buy a house, we never typically think of this as an investment, but technically it is one.
Investing can also be about spending time or money to improve your life or the lives of others, we talk about investing in someone, be they a friend, partner, or child. This is a more personal type of investment.
But when we are talking about finances, investing is the purchase of securities, real estate, stocks, and other items of value in the pursuit of capital gains and an increased income.
How Does Investing Work?
So, how exactly does investing work? In the most straightforward way, investing works when you simply buy an asset at a low price, and sell it at a higher price.
Using the home buying example we mentioned earlier, imagine you bought a house for $55,000, then renovated it for $6,000. As time goes on, you wait for the market to become right and the location desirable, and you end up selling for $100,000 and gain around $39,000 (minus selling costs). This would be an example of an investment many of us will make in our lifetime. However, just like with buying a house, there is no guarantee that you will always end up flipping for a profit. Investing is just like gambling in that sense, you are always taking a chance.
When you make an investment and that investment gains in value between when you buy it and when you sell it, it is also known as appreciation. For example, if you were to invest in the stock market, then the share of a stock can appreciate when a company creates a hot new product that boosts its sales and increases the company’s revenues.
Similar to profits and capital gains, investing can also work when you decide to buy and hold assets that generate income. Instead of realizing capital gains by selling an asset, the goal of this is to buy assets that will generate cash flow over time, and hold onto them without selling them. An example of this is how many stocks pay dividends, instead of buying and selling, dividend investors hold stocks and profit from the dividend income.
Different Types of Investing
So, now we understand what stocks are, and the basics of how they work. What are the different types of investing?
Well, there are many types of investing. Let’s go through these types with you.
A stock represents an ownership share in a company, also known as equity shares, when you invest this is what you get. Whether you make or lose money on a stock will depend on the success or failure of the company, which type of stock you own, and what is going on in that market overall. While it is somewhat of a gamble, keep in mind that well-run companies will generally increase in value over time; many also pay shareholders a dividend on a quarterly basis.
Stocks and stock mutual funds often can be an important component of a diversified investment portfolio.
You will often hear the term ‘stocks and bonds’ and most of us will know this phrase from movies or TV, and therefore throw the two in the same ballpark. However, bonds are different. A bond is a loan an investor makes to a corporation, government, federal agency, or another organization in exchange for interest payments over a specified period, plus the repayment of principal at the bond’s date of maturity. There are many types of bonds including treasuries, agency bonds, corporate bonds, municipal bonds, and so on.
Mutual funds are a very popular way to invest in securities. As these can offer built-in diversification and professional management, many people see these as advantageous over purchasing individual stocks and bonds. However, much like investing in any security, investing in mutual funds involves risks, including that you may lose money. Additionally, mutual funds charge management fees that can cut into your return. For this reason, a lot of money has come out of actively managed mutual funds and moved to index funds and ETFs.
Index funds are investments that are made up from stocks that mirror the companies and the performance of a particular market index, such as S&P 500. Index funds are passively managed and typically have lower fees than actively managed funds, and they will typically also generate higher investment returns. They are basically well-diversified investments.
Exchange-Traded funds or (ETFs) combine aspects of mutual funds and your conventional stocks. Much like a mutual fund, ETFs are a pooled investment fund that will offer an investor an interest in a diversified portfolio of investments. But, on the other hand, they are unlike mutual funds in that they share trade like stocks on stock exchanges and can then be bought or sold throughout the trading day at a variety of fluctuating prices.
An annuity is a contract between you and an insurance company, in this the insurance company will promise to make periodic payments to you, either starting straight away or at some time in the future. You buy this either with a single payment or a series of payments, which are called premiums. (Now you know what we are talking about.)
The two most common types of this are fixed and variable, you can also get an indexed annuity, often referred to as an equity-indexed annuity or a fixed index annuity.
This is an investment that we often forget to consider an investment, as we are investing in ourselves and our futures. Saving for retirement and managing income once you retire are basically just an investment of personal financial management. When it comes to saving, tax-advantaged options such as a 401(k) or IRA can be very smart choices. As well as tax benefits, there is the opportunity for your savings to compound over time as well. Though we do not often think of it as an investment, planning for retirement is an investment in oneself.
Saving for Education
Saving for education is an investment for either yourself or a child. Education funding always begins with saving. While college and education in general are rising in cost, it is not all doom and gloom, there are many smart, tax-advantaged ways you can save for education such as 529 plans and Coverdell education savings accounts.
Saving for education is an investment as you are investing in the future. This is a more personal investment, but like all investments, it is still a gamble, as you cannot predict exactly what the outcome will be.
Real estate has to be one of the most common investments. It involves the purchase, ownership, management, and/or sale of the real estate for profit. Improvement of the property as part of real estate investing is generally considered to be a subspecialty known as real estate development.
Real estate is considered to be an asset form with limited liquidity in relation to other investment types such as stocks or bonds that will typically openly trade in financial markets.
Alternative and Complex Products
What does this mean? Well, investment products abound that offer alternatives to conventional stock and bond investments is what we are talking about. These are products that are occasionally referred to as structured products or non-conventional investments. They tend to be both more complex, and equally more risky, than a traditional investment. They will often tempt investors with special features and higher returns than are offered by basic investments.
Initial Coin Offerings and Cryptocurrencies
One of the more recent types of investment is in cryptocurrencies. Digital assets such as cryptocurrencies and ICO’s are evolving and sparking interest from Main Street investors. With billions in ICO financings, and thousands of different cryptocurrencies available, these are rapidly challenging markets that are very tempting for investors to dip their toes into.
It is difficult for most individual investors to make sense of these, as they are complex investment products, and it is not easy to determine the risk levels associated with them.
Here we are talking about commodity futures contracts, which are agreements to buy or sell a specific quantity of a commodity at a specified price on a particular date in the future. This can include things such as metals, oils, grains, animal products, as well as financial instruments and currencies. With limited exceptions, trading in futures contracts had to be done on the floor of a commodity exchange.
Options Trading- Calls and Puts
These are conditional derivative contracts, allowing buyers of these contacts to buy or sell a security at any chosen price. Buyers of these options are charged a premium by sellers for this, then should market prices be unflavored for holders of these options, they will let it expire, worthless, and ensuring the losses do not escalate beyond the premium. Option sellers assume a greater risk- hence the premium.
Options are categorized into ‘call’ or ‘put’ options. Call options have the buyer of the contract purchasing the right to buy the asset in the future at a predetermined price. With put options, the buyer buys the right to sell the asset in the future at the predetermined price.
There are many strategies you can use to trade in options; buying calls, buying puts, covered calls, and protective puts, all of which are suitable for beginners in options trading.
Insurance is also an investment. Life insurance products are often a part of an overall financial plan. This can come in varying forms, including term life, whole life, and universal life policies. There are also variations of these, variable life insurance and variable universal life insurance, which are considered to be securities and must be registered with the SEC.
Insurance products are often made to meet specified objectives. We may not think of insurance as an investment, but it is, indeed, an investment.
How To Start Investing
If you fancy giving investing a go, there is nothing to stop you but yourself. It is relatively easy to dip your toes into the investment pool, and when you start up you do not necessarily need to have oodles of cash either.
But before you do that, there are a few things that you should consider and keep in mind first.
Only You Can Decide If Investing Is Right For You
No one can tell you that investing is for you. Some people cannot get comfortable with taking any real risk, and simply leave their extra money in a savings account. But many people are willing to take on some level of risk in order to grow their wealth and generate income. Not everyone is willing to take this risk, so do not feel obligated to do so if the risk that comes with investing feels too uncertain for you. Only you can make a decision about whether investing is something that you want to do.
This is why it is important to start small and work your way up. As you test the waters, it is best to start with a small investment, to see if investing in the right thing for you. Starting off small means that if you find that investing isn’t for you, you are not losing out tremendously, and you don’t end up losing a lot of money.
Open An Account In Your Desired Trading Platform
For beginners, funds are typically the best option. However, if you have a little money to start up an account, but you do not want the burden of picking and choosing investments, you could start investing with a ‘robo-advisor’. Robo-advisors are automated investing platforms that help you to invest your money in pre-made, diversified portfolios, customer for risk tolerance and financial goals.
Some people may seek out a more hands-on approach, where you are choosing your own individual investments. If this is the case, you can open an online brokerage account and hand-pick your own investments. If you are a beginner, it is important to remember the easy diversification that mutual funds and ETFs both offer.
Should you want to invest, but you are anxious about it and want a more hands-off approach, you can always talk to a financial advisor who works with new investors. They can help with your goals and manage your investments over time.
Start Investing Early
Invest as early as you can to get the ball rolling in your investments. If you are young, you may feel a bit skeptical about investing. There is not much satisfaction in investing in the short-term, however, investing at a young age is one of the smartest and the easiest ways to build massive wealth.
Starting your investments early on in your life is beneficial, because the prices of things are getting ever more expensive. Then you must also anticipate compound interest, this is something that works for you and if you keep investing for years, this can actually overtake your paycheck.
Investing also helps you develop better financial habits, builds experience so that you are smarter about it over time, as well as financial freedoms. But, this is only possible if you keep it up.
This is why you must invest regularly. Doing so aids you in taking advantage of the natural market fluctuations. When you invest a consistent amount over time, you will buy fewer shares when prices are high and more shares when prices are low. Over time, this can help you to pay less on your average per share, which is something known as dollar-cost-averaging.
Do always remember though, investments are not guaranteed, and an investment is a lot like gambling, you are taking a chance that your efforts will pay off. Nothing is set in stone.
Try To Diversify As Much As You Can To Lower Your Risk Exposure
Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to, therefore, maximize returns by investing in different areas that would each react differently to the same event.
A majority of professional investors will agree that, while it does not guarantee you won’t have losses, it is the most important component of reaching long-range financial goals and minimizing the risks of severe losses.
Let’s say you have a portfolio that only has airline stocks, following any bad news, share prices will plummet, and this means that your portfolio will experience a noticeable drop in value. You could then counterbalance these stocks with some energy stocks, so only part of your portfolio is affected, and there is a chance that if airline stocks fell, energy stocks may rise, thus balancing things out for you. Though it is not guaranteed, it is a good way to keep yourself better covered.
The Greater Return You Want, The Higher The Risk You’ll Usually Have To Take
As is with most things in life, the more you want to gain, the bigger a risk you will have to take. Investing is no different, think of investing as gambling. If you are not fussed about big wins, you would likely play small payout games with higher chances of a win, right? However, if you are seeking the big bucks, you will try out riskier games that have a lower chance of winning but a much bigger payout.
Investing is like gambling, and you will have to accept that the greater a return you seek, the more risks you will need to accept. The higher return that you are seeking from your investments, the greater the chances are of losing some of all of your capital in the short term.
If you are saving over short term periods, then we would recommend against taking too much capital risk. However, if you are investing in the long term, then you can typically afford to take more risks.
Everything in our lives is managed by risk, bigger risks have bigger consequences, either good or bad. In investing, you must be prepared for this.
Don’t Panic If You See You Are Losing Money
Whenever we see we lose money, we instantly panic. These days, financial security is as necessary for us to live as the water we drink and the food we eat. And when we start to see finances disappear, we panic.
Go against those instincts, as hard as it may be, and do not panic. When you panic, you often make choices that you have not entirely thought through, such as panic selling. Panic selling is typically people’s first reaction when they see that the stocks are going down, and there is a sudden, drastic drop in the value of their hard-earned funds. This is why you need to know risk tolerance, and how your portfolio’s price fluctuations and volatility will affect you. The best way to avoid situations like this, is to simply try diversification, it covers your back and can counterbalance instances like such.
Don’t Invest money you need to live on
With investing, there is always a possibility that you will lose money. Many other investors have faced a cash crunch because they could not easily convert their investment back to cash as it was illiquid or required paying taxes on their gains. You always want to ensure you have enough cash in your checking account to pay several months of your living expenses. You should also avoid investing large amounts of your wealth in risky investments that could lose a great deal of their value. Especially when you are starting up, try to stay with ‘safer’ investments as you learn. And, even once you are more experienced, risky investments are still best avoided, preventing a large loss of cash.
Patience Is Key
Rome wasn’t built in a day, and your investment portfolio won’t be either. If you are the impatient type, investing may not be for you. Investing is about long-term growth, it can take a long time for your investments to yield any significant funds, thus, you must be patient.
Most investors are advised to start young, so that when they reach their 40s, 50s, or 60s, they have made a significant amount from their investments that will be very useful for their later years with the non-stop rise in the cost of living.
Unusual Investments To Consider Investing In
We have mentioned a few different types of investments today, however, there are some particularly unusual markets that you may not quite expect investments to be a part of. However, you can invest in almost anything, and some of these things may surprise you.
These investments are a variety of the many types of investments there are, but these are all specific things that you can invest in. You might be a passionate investor, who has a forte in knowledge about one of these unusual niche investment areas, if you are, perhaps you will find that this is the investment opportunity for you.
For example, you can invest in domain names. There are several ways that you can invest in domain names. From flipping domains, to holding them for appreciation, to parking and developing the name into an income producing website. You can get brandable domain names which will often have a lot of value, but some will simply buy domain names for their existing traffic, inbound links, or other search engine optimization ranking factors that make it a successful financial ploy.
If that is not to your taste, you could look at leveraged ETFs. Exchange traded funds will consist of a basket of stocks, not unlike mutual funds, however they are more in liquid form, and are often lower in cost. With these, an investor can easily take advantage of the leverage to amplify the returns if the underlying stocks end up appreciating.
One type of investment you may have heard of is mineral rights. Some people will luck into this simply by owning land that ends up having oil, natural gasses, or a valuable mineral hidden underneath. If this is the case, then they allow someone to come in and extract the minerals for a fee.
In other cases, others will systematically buy the mineral rights from many landowners. The goal is to turn a profit by selling or leasing them to companies that may wish to explore for, drill for, or extract any particular minerals therein.
In some states, it is possible that when property owners do not pay property taxes, an investor can actually step in and then pay the taxes in return for a tax lien.
To redeem this lien, the property owner must pay the amount of taxes back plus an interest to the investor. If they fail to redeem after a period of time, then the investor can foreclose and take ownership of the property.
This is a type of investment not particularly common among the public, but it is still a smart investment.
You would not think that this could be an investment, but it is. Doctors and dentists can buy themselves an instant stream of customers by acquiring a medical practice.
There are plenty of opportunities for outsiders to invest in this by partnering with doctors for an equity stake, or making loans to doctors, thus secured by either the practice itself, or by real estate.
Publishers are basically investors. When a publisher offers the author a book advance and future royalties, the publishing company can buy the rights to future income generated from the sale.
As much of what publishing companies actually do can easily be outsourced, such as printing, editing, cover designs, PR, cosigning inventory, and advertising, any authors will leave millions on the table between what they sell their publishing rights for and what the book has the potential to make. However, publishers are renowned, and therefore they are capable of getting a book into places that outsourcing methods cannot, so generally, in the long term, this pays off for both parties. The author and the publisher/ investor.
If none of these tickle your fancy, raw land is another option. This does not generate a monthly income typically, however it still remains to be a practical investment opportunity. You can buy land for development, to assemblage subdivide, or sell land owned- free and clear.
Land banking is also popular, and holding land for future developments while trying to generate an interim income or to minimize taxes and holding costs.
It’s a gamble, but often you may find that big name insurance companies will offload their risk of a large catastrophic event, such as a hurricane, tsunami, or earthquake, by selling high-yielding cat bonds. Investors will get a nice coupon and the return of their principal if a catastrophe above a certain dollar loss threshold does not hit while they own these bonds.
We all need water, it’s a necessary part of living, and we would not be able to live without it. Getting it from the ground and into your sink is actually rather complicated. Smart investors know this, and they will gain control of land, the water rights can then sometimes achieve a massive return on investment when they then sell the water to a major emerging city, or municipality that has to keep up with its citizens in the demand for water. What is always good to note is investing in a year round natural water supply can be exceptionally beneficial- especially in drought season, when water is basically liquid gold.
Overall, what can we say? Investing takes time, and you cannot expect your efforts to pay off straight away. Investing is an effort, years in the making, but you will see the benefits at the end.
Like many things financial, you should always start your investment with plenty of research. Whether you are investing in stocks, bonds, retirement, real estate, or even tax liens, research is important, and understanding how investing works is paramount to making profits.