Basics of Investing: What you need to know before you start investing

Investing. The word alone produces many varied reactions. Some people hear words like stocks, bonds, assets and diversification and immediately start daydreaming they’re somewhere tropical (or anywhere else, really). Others are energized by talking about mutual funds, controlling risk and a balanced portfolio.

Whether you’ve never invested before, have dipped your toes in the water a bit, or you’re a pro at swimming with the investment sharks, take a peek at our investment basics to see if you learn something new.

How to start investing

1. Get into the habit of building your savings. Yeah, you knew we were going to start with this one! You can’t invest unless you have a little extra money set aside—so if you’re not already, start saving on a regular basis. We recommend an “out of sight, out of mind” approach, such as automatic paycheck deductions (like contributions to an employer-sponsored retirement plan) or automatic transfers to savings. This way saving money isn’t an afterthought or done with whatever is left over.
2. Do your homework. Whether you prefer to do research online, take a class, meet with a financial advisor or a combination of these, become an investing student. The Verve Wealth Management website has a variety of retirement and investment articles. Take some time to learn about investment accounts (such as stocks, bonds, index funds and mutual funds), diversification, taxes and how to build a balanced portfolio. Then connect with a pro who can help you determine the best approach to financial planning.
3. Determine how much risk you’re willing to take. Like it sounds, risk is how much change in the market you are comfortable with. If you find yourself on the lower end of the risk tolerance spectrum, you’ll want to look for investments that aren’t as impacted by market swings. These investments also typically don’t have as high of a yield.

A quick reference guide to common investment terms

• Stocks: By purchasing a stock, you are essentially purchasing a piece of that company. That means you have a claim on its future profits. There are two primary ways to make money by investing in a stock: through stock appreciation, which is when a stock you own goes up in value and you sell it for more than what you purchased it for; and dividends, which are a periodic payment issued by some stocks as a way for the company to give a portion of its earnings to shareholders.
• Bonds: When you purchase a bond, you are essentially funding a loan for a large organization, government entity or company. These “loans” are typically used to pay for major projects (such as a new arena) or business expansions. Bonds have a set maturity date, which is when investors can expect to have their principal investment paid back to them by the bond issuer. Bond purchasers also earn interest, which is paid by the organization issuing the bond.
• CDs: Certificate of Deposits (also called Share Certificates) function much like a savings account by allowing you to set aside money at a higher interest or dividend rate for a certain period of time. Typical investment periods range from 3 months to 5 years, and fees apply for money withdrawn before the investment term expires.
• Diversification: Like the word suggests, diversification means investing in a variety of asset classes (like stocks, bonds and cash alternatives) that perform differently. By not putting all of your eggs in one basket, your overall investments don’t take as big of a hit if one type of investment performs poorly under changes in market conditions.
• Asset allocation: This refers to how you invest your funds among various investment classes, such as stocks, bonds and cash alternatives.
• Stock market indexes: Used to predict economic performances by country and globally, there are a variety of stock market indexes. The major ones in the U.S. include the: S&P 500, Dow Jones Industrial Average and Nasdaq Composite.
• Mutual funds: A diversified collection of stocks, bonds and other assets, mutual funds are picked and managed for you by an investment company. They usually carry a higher investment fee and are considered an active management investment.
• Index funds: Unlike mutual funds, which are selected based on stocks a portfolio manager thinks will perform best, index funds purchase all shares that make up a particular index (such as the Dow Jones) to replicate the performance in that particular market.

Now that you’ve gotten your feet wet in the basics of investing and some common investment terminology, share this article with your family and friends so they can get an introduction to investing, too!