Investing can often be a subject people struggle to comprehend, so we've devised a guide for beginners on exactly what investing is and how you can get started on your journey in 2023. You might think that you don't have the money to start investing, but investing is now more accessible than ever and you can get started with as little as ten dollars.
Investing is a way to earn a return from your money. The best place to invest historically over the long term is the U.S. stock market because on average, it produces an 8-10% return every year. One of the most popular methods of investing is investing in an index. An example of this would be the S&P 500, which is a collection of the 500 largest companies in the USA, at any given time.
When you buy a stock (also known as shares), it means you own a piece of that company. For example, if you buy a share of Apple, you now own a small fraction of Apple's business. This means if Apple's business is successful, and if it continues to increase its sales and profits, it will command a higher valuation. If the valuation increases, so will your shares in the company. This means that if you pick a company that continues to be successful over time, your share will continue to be worth more over the long term, without you having to do anything.
Compound interest is the most important factor when it comes to investing. All investors should strive to invest for the long term -- here's why. Let's say you invest $100 this year. And let's take that average return of 8-10% per year we talked about previously. Now, let's set it and forget it and come back in 10 years. Your investment is now worth between $215-259. Now, you might say 150 bucks over 10 years! I'd rather spend it. So let's go into how the real magic happens -- by contributing regularly.
So now, let's take the initial $100, and let's add an extra $100 to your investment each month every time you get paid. So you would now contribute over $12,000 in total over the 10 years, but your investment would be worth between $17,599 and $19,384 based on an 8-10% annual return. That's an extra $5,000 - $7,000 for essentially doing nothing. After 30 years, your $100 contributions would be worth between $136,000 and $199,000!
Now that's just an example -- but it highlights that the more you can afford to invest, the greater your returns can be. There's no perfect formula on how much to invest but a good starting point for anyone saving or investing is about 10-25% of your income. If you save or invest that much, you'll likely never have too many financial worries.
To invest, you need to set up a brokerage account. Don't worry, it's easier than you think. Most brokerages now have apps available for mobile that simplify getting started. You will likely need to submit your ID, proof of address, and your tax details, but that's it. After a day or two, your account should be approved!
One of the most important factors when starting out is minimizing how much you pay in brokerage fees, so look out for zero-fee or low-fee options, if you're trying to minimize costs.
We always encourage investors to invest in their circle of competence, which means investing in what you know.
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Remember, your first stock pick isn't the most important thing; maximizing the time your invested is. If at first, you're unsure about your first investment, search for some of your favorite companies or check out our Learn App to see what we look for when researching stock picks.
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