6 Things Every New Investor Ought to Know
Becoming an investor for the first time can be exciting if also a little overwhelming. Alongside the thrill of ownership is the jargon, legalese, and sometimes-confusing world of a 200-year-old industry. Don’t worry, though—we’ve got your back. Here are six things to know as you start kicking the investment tires.
1) How returns work
When many people talk about making money from investing, they’re usually talking about positive returns from buying low and selling high. There are two basic types: unrealized and realized returns. Let’s talk through some examples.
The shares you own are worth more than they were when you got them, but you haven’t sold them—so you haven’t turned that value into money.
The shares you’ve held have either provided dividends back from the company, or you’ve sold them for more than you bought them for and made money.
Another term you might hear a lot when it comes to returns is “annual rate of return.” Your annual rate of return is how much the value of your investment changes over a period of time. A positive rate of return means your investment increased in value.
There’s also such a thing as your “real rate of return,” which is your rate of return after inflation. So if your annual rate of return was 10% and inflation was 2%, then your real rate of return would be 8%. It’s helpful to keep in mind so you know what your returns actually are.
2) Not all investments are long-term
When you’re new to investing, it can be easy to assume that it’s all about the long-term, like 401ks and retirement plans.
That’s a misconception. Just like you might have a variety of relationships in your life—quick flings, school friends, maybe someone you lock down for life—you might also have a variety of investments you hold for varying amounts of time.
Why? Well, one reason is that your time horizon for investments is a very personal thing—it depends on the financial goals you’re hoping to meet. If you’re hoping to use investments returns to buy a car or fund a vacation, for instance, that’s not the same time commitment as, say, if you’re in your 20s or 30s and looking to save for retirement.
You can read more about time horizon, risk tolerance, and goals in our post about portfolios.
3) Investing is a head game (but it can have heart, too)
A lot of standard investing advice out in the world might tell you to invest rationally, think about your strategy logically, and avoid emotional investing (aka, letting the fear of missing out drive your decisions).
It makes sense. Purchasing shares of a company’s stock because it’s the stock everyone is talking about could result in you paying more for it than you might otherwise be willing to pay—especially given the actual facts that drive its value (instead of just the popular buzz).
Similarly, selling your shares of a stock that’s getting negative press could result in you selling for a lower price than the market might otherwise price it given the facts, because fewer people are looking to buy it in that moment. Instead it might be a good time to do some research to understand if any of the news is meaningful to the company, industry, market, or you—and if it’s enough to change your mind about whether you want to own it. Basically, making fear-based decisions can result in lower returns in the long-run.
But just because you aren't viewing investing emotionally doesn’t mean there can’t be any heart involved. Choosing to own pieces of companies that share and reflect your own values can make your strategy a little more fun and a lot more personal.
4) Ownership can have perks
When you buy shares of stock in a company, you become a partial owner of it—which is cool! That means that when you shop at, eat at, or otherwise support a company you own shares of, you’re helping the company succeed and hopefully helping increase the value of your shares. It’s a win-win.
There are also other cool perks of being a partial owner. If you have at least one full share of common stock in a company, you can vote in shareholder meetings. Some companies pay dividends. Some even have special discounts and benefits to celebrate their shareholders. While these may not be your primary reasons to invest, they’re definitely nice to have. (You can read more about potential ownership benefits and perks in our post dedicated to it here.)
5) It can help to take it one step at a time
There are a lot of complex investment strategies out there for the experienced investor, and it can be tempting to dive into those when you’re first getting your feet wet. It’s a good idea to make sure you’re comfortable in the shallow end before you kick out into deeper investment waters. If you do eventually want to get into those more complicated strategies, doing some research and digging into the why and how can help you do so with confidence. An educated investor is a happy investor.
6) It’s not too late to get started
When should you start investing? The sooner the better, because your money has more opportunity to grow. But don’t worry—it’s not too late to be getting started. Investing at any point is better than not investing at all.