What Does it Mean to Invest?
2017 was a great year for all three stock market indexes. The Dow Jones Industrial Average is up 25 percent, the S&P 500 is up 19 percent, and the NASDAQ is up 28 percent. The increases in these markets reflected a booming U.S. economy and excellent corporate profits. The expectation of President Trump signing a tax cut bill, which he signed a few days before Christmas, also fueled the rise in the stock market.
One of the things this tax cut bill offers is a lowering of the corporate tax rate from 35 percent to 21 percent. Because of this, American businesses are expected to return hundreds of billions of dollars in foreign profits back to the U.S., higher more workers, spend money on building domestic factories, and pay down debts. This is expected to create a further rise in the stock market, which is helping to create wealth in many households.
Stocks are not the only investments that are rising in this positive economic environment. Real estate, bonds, precious metals, and other types of investments have shown signs of strength in this economy. Unfortunately, half of all adult Americans do not have any kind of investments, which is a leading factor in wealth inequality in this country. With the stock market breaking records almost on a weekly basis, you should consider investing so that you can take advantage of wealth creating opportunities and not be left behind.
What does it mean to invest?
Setting money aside to let it work for you instead of you working for the money is the essence of investing. Investing is about making it a priority to secure your financial future over spending money today for instant gratification. This is not to say you shouldn’t enjoy the fruits of your hard-earned labor. Working long hours away from your family because you have to meet a deadline can be very stressful. Going on a nice vacation, buying new clothes, or having a nice dinner at a fancy restaurant are some of the ways we all let go of the tension. At the same time, we need to be mindful that we need to invest some of the money we make so that we don’t have work the rest of our lives.
You may see terms like investing, saving, and trading used interchangeably, but these terms have different meanings. Investing involves having a long-term goal of five or more years where you are looking to maximize profits with a reasonable amount of risk. Saving can either be short-term or long-term, but unlike investing, saving involves little to no risk. Saving is more about preserving capital rather than growing capital. Trading involves short-term ownership of stocks. Ownership can be anywhere from a few minutes to one year. Traders analyze stocks like investors, but traders are more interested in short-term swings in the market for immediate profits. If you are looking to secure your financial future, it is best to invest.
What kind of investments are available?
There are many different types of investment available that can suit your investment strategy and risk tolerance. Here is some basic information about different types of investments that can help you achieve your financial goals:
Stocks – Owning shares of a company means you own a piece of that company. You can own shares of a small company with one location and less than a million dollars in annual revenue to a large multinational company with billions of dollars in annual revenue. The types of stocks include domestic, international, penny, growth, value, and many more. Many stocks pay dividends that you can take as cash or you can reinvest and purchase more shares. You can also buy individual stocks or purchase a group of stocks through a mutual fund.
Bonds – When a company, government agency, or some other type of organization needs to raise money, they can do this through issuing bonds. A bond is a loan that the investor gives to the organization and in return, the organization will pay back the loan on the date of maturity to the investor with interest. The maturity date can be one day to 100 years, but a common maturity date occurs at 30 years. Bonds can be short, intermediate, or long-term and most bonds can be cashed out before the maturity date. You can purchase individual bonds or purchase a group of bonds through a mutual fund.
Exchange Traded Funds (ETF) – ETFs have become popular in recent years. It acts like a mutual fund in that you can purchase a group of stocks or bonds through one ETF. What makes this different from a mutual fund is that the ETF has lower fees and can be traded, sold, or transferred on the stock exchange like an individual stock. Each ETF is composed of stocks and bonds within a specific industry like consumer goods, utilities, technology, or foreign currency. A mutual fund can have stocks and bonds from companies that represent a variety of industries within its portfolio.
Real estate – Some investors prefer a tangible investment that they can see and touch. Other investors want to diversify their investment portfolio into something other than stocks and bonds. Real estate is a physical commodity that will always be around because everyone from an individual person to a billion-dollar corporation needs shelter. Real estate produces income through rents or capital appreciation, and there are generous tax benefits for owning investment properties.
Precious metals – Gold and silver have been traded, bought, and sold for thousands of years. Gold, silver, platinum, and palladium are often used as a hedge against economic downturns, which can prevent a heavy loss of your portfolio. It is easy to track the value of precious metals like gold. When the value of the U.S. dollar goes down, the value of tends gold goes up. When the value of the U.S. dollar goes up, the value of gold tends to go down. Precious metals are also tangible assets if you like to see and touch your investment.
What are the pros and cons of investing?
Investing is a long-term strategy for accumulating wealth and creating financial security for yourself and your family. The stocks, bonds, real estate, and precious metals markets can experience many changes over the course of time from bull markets to bear markets. Each market has its own set of advantages and disadvantages.
The advantages of being an investor include:
– Potential long-term growth of invested capital
– Potential growth of income from dividend payments and rent
– Potential to outpace inflation and rises in the cost-of-living through capital growth
– Potential to earn additional income so you can pursue your dreams
– Potential to benefit from paying lower capital gains taxes
The disadvantages of being an investor include:
– Potential to lose all your money on an investment when the economy goes bad or when a bad investment choice is made
– Potential inability of your investments to outperform the market or other investments within the same asset class
– Potential short-term volatility can prompt you to sell your investment before gains are realized
– Potential lack of liquidity if you need to sell your investment, especially when it comes to a real estate investment property
Investing can be intimidating and overwhelming if you have never created an investment portfolio. Investing is not as hard as it looks, and there are plenty of online brokerages that make it easy for anybody to open an account. They even offer tutorials on how to invest. One of the best things you can do for a better financial future is to start investing now.