An investment guide for beginners from a wealth advisor
If there’s one thing we can’t stress enough, it’s to make your money work for you. “How”, you may be asking. One way is to invest. But we’ll be the first to admit navigating the world of investments can be tricky, especially if words like stocks, mutual funds, and ETFs make you dizzy.
This is why we’ve teamed up with our very own Randa Hamdan, one of our wealth management advisors, to answer some frequently asked questions about investments to help you begin investing with confidence!
But first, what’s an investment?
An investment is something — usually stocks, bonds, etc. — you spend money that you expect will earn a financial return over time.
What are some types of investments?
Bonds represent a loan you would give to a borrower like a corporation or government. While the borrower uses the money to carry out its operations, you would receive a predetermined interest rate on your investment over a set period. This is why bonds are known as “fixed-income instruments”, Randa says. Moreover, bonds also have a maturity date, just like real loans. Once they reach it, the bond issuer (i.e., the corporation or government) must pay back the money to the bondholder (i.e., you) who loaned them.
Stocks are probably the most known type of investment. When you buy shares in a company, you gain fractional ownership of that company, which entitles you to certain benefits. These include receiving dividends — i.e., a proportion of a company’s profits equal to how many shares you own or selling shares when stock prices increase to make some money.
Mutual funds are professionally managed investments that allow you to pool your money with other investors to buy a collection of stocks, bonds, or other assets. Randa recommends this type of investment for anyone who wants to diversify their portfolio but may find it hard to do so alone. And as a mutual fund investor, you wouldn’t own the assets in the fund. Instead, you’d own units of them, and income would come from stock profits, interest on bonds, or capital gain — i.e., when you sell an asset for a higher price than you bought it.
Exchange-traded funds (ETFs) are similar to mutual funds in that they’re also a collection of assets you can own units of. But ETFs have some differences. First, they are bought and sold on a stock exchange like stocks. Second, ETFs can be bought and sold at any time throughout a trading day, so you can make money off them by monitoring their price fluctuations and picking when to buy and sell.
Do you need to earn a minimum salary to invest?
According to Randa, there are no hard and fast rules about how much you should be earning, as long as you have “sufficient funds to get you through the month”. But to avoid overextending yourself, Randa recommends allocating 10% to 15% of your salary to investments.
Moreover, she shares that the minimum amount you’ll need for investments will vary depending on their type. For example, when trading stocks, you pay for what you pick and how many shares you buy. With ETFs and some mutual funds, you pay for whatever the price per unit in a fund is.
But with other types of mutual funds, you’ll need to pay somewhere between $500 to $5,000. For bonds, on the other hand, you’ll have to drop more money because they cost upwards of $50,000.
So, even if the 10% to 15% isn’t enough now, regularly set that amount on the side until it is.
Are there fees associated with investments?
As with most things you buy, Randa reminds us there are fees associated with investment products and services. Knowing and understanding these fees is important to invest wisely.
Here are some:
- Buying fee: this is separate from the price of an asset and is what you pay to compensate the broker for the buying process of an investment.
- Selling fee: this is a fee that you pay to compensate your broker for the selling process of an investment.
- Spread fee: this is the difference between the highest price that buyers are willing to pay and the lowest that sellers are willing to accept.
- Management fee: this is the fee for having an investment fund managed professionally by an investment manager.
- Custodial fee: this is what an investor pays to their broker for safekeeping their investments.
What else should you consider when investing?
No investment is risk-free. When investing, you’ll be exposed to the uncertainty of the market. This means the value of your investment will rise and fall. So, ask yourself, “if the stocks I own were to decline, would I feel so uncomfortable that I’d sell them even if it’s the wrong time”? If you answered “yes”, listen to Randa. She says, “understand the risks you can tolerate because
knowing this will help you choose which investments are best suited for you”.
Aside from the above, Randa urges you to consider the time horizon of your investment. This refers to how long you plan to or can hold an asset before selling it. Randa says, “if you can afford to put money away for a goal that’s at least 5 years away, then investing is for you. But if you’re thinking of investing to cover the cost of a new car or a wedding, then deposit products are better”.
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