So you got a great stream of income, got a new salary raised and looking for a great way to put your funds into a great investment. you are a beginner and investing although great looks scary to you because you don’t want to lose money in shady deals (let’s be honest -who want to make a loss? best you guess is any one answering that you will most definitely reply with a big “NO”
As a beginner, there are a million ideas that run through your mind when you see people on Forbes hitting millions from their valued assets (investment). Before you proceed, you should note that all investment is generally classified as:
- Good investment
- Bad investment
- Good investment involves putting funds into great income-streams. An example of a rich tycoon who does this is Robert Kiyosaki, author of Rich Dad Poor Dad. In a simple chart low, a great business module should go like this:
Good investment is investment whose income is greater than its expenses, can survive in the long run while self-sustaining itself.
- Bad investment: This type of investment are usually short-term and promises huge profit within a short period of time when compared to the capital required. Most people tend to go for this type of investment as it promises heaven on earth but the end is usually disastrous causing investors to lose their capital. An example of a bad investment.
Nobody starts out as a professional investor, and even the best investors in the world were once in your shoes.
You might be wondering:
- Where should I begin?
- How do I begin?
These two questions are seemingly daunting to newbies especially if you’ve encountered the huge collection of investing terms that look like the bogie man-like alternative Minimum Tax (AMT), Annualized rate of return and asset allocation and market capitalization.
Getting started and acquainting yourself to the investment world isn’t as scary as it might seem. In fact it can become pretty easy with good practice.
Investing As A Beginner: A Full Guide
The first step to wise investing is perceive and decide the type of asset you want to own: But here’s the kicker, investing is about spending money, time or energy with the expectation of getting more of any resources back in the future- a few factors like inflation, time, risk, annual growth rate etc. go a long way in making sure you get the best or worst from your investment.
This is best accomplished through the acquisition of productive assets. Productive assets are investments that are capable of producing something, especially in abundance from some sort of activity. For example, if you buy a painting( cheap or expensive), it is not a productive asset because 50 years from now, you will still only own a painting which may or may not worth more or less money. You may however be able to convert it into a quan-productive asset (similar to productive asset) by opening a museum and charging a fee of entry to see it. On the other hand, if you purchase an apartment building, you will not only have the building, but all of the cash it produces from rent and service income over time. If the building were to be destroyed, you’d still have the cash flow from years of operation- which you could use to support your lifestyle, giving to those in need, or reinvested in other business opportunities.
Keep in mind that each type of productive asset has its own advantage and disadvantage, unique unusual traits, tax rules, legal system and other relevant features. In a wide sense, productive assets can be divided into stocks, bonds and real estate.
Investing in Stocks
Investing in stocks simply means business ownership or business equity. You are entitled to a share of the profit or lossless by a company’s operational activity when you own equity in that business. Over time, equities have proven to be the most rewarding investment for investors seeking to build wealth over time without using huge amounts of leverage.
It gets better:
Business equity investments can come in one of two forms; publicly traded and privately held.
Investing in Publicly Traded Business: Initial public offering (IPO) allows private business sometimes to sell part of themselves to outside investors. When this happens, anyone can buy shares and become an equity owner.
The type of publicly traded stock you own may differ based on timing and market value. For example, if you are the type of person that likes companies that are stable and provide a frequent cash flow for owners, you are most probably going to be drawn to blue-chip stocks, and may even have an affinity for dividend investing, value investing and dividend growth investing.
Investing in Privately Held Business: Privately held businesses are businesses that have no public market for their shares. In other words, they do not sell shares publicly and as a result of this, only a few people get to own these shares.
Want to know the best part?
They can be a high-risk proposal which can be highly rewarding for the entrepreneur when started from scratch. It’s fairly simple and requires:
- You think of an idea(idea creation)
- You pull resources together to run the business while making sure that your expenses are less when compared with your revenue.
- Over time, you let it grow to it’s fullest potential.
- Make sure that you are being well compensated for your time and capital that you invest in it. A good return is experienced when you can earn from the investment passively.
What’s the bottom line?
Running or owning a business is not easy but owning a good business can and will most certainly put food on your table, pay for your vacations, send your children to college and the university and most importantly, allow you to retire in comfort.
Investing in Bonds (Fixed-income securities)
When you purchase bonds; you are lending money to the bond issuer in exchange for interest income. There are about 10 thousand ways this can be done, ranging from money markets and buying certificates of deposit to U.S savings bonds to investing in tax-free municipal bonds and corporate bonds investment.
Just like stocks, many fixed-income securities require you make purchase through a brokerage account. To choose your broker, you will need to select between either a discount or full-service model. When operating a new brokerage account, the, minimum investment can vary, usually ranging from $400, $500 to $1,000; usually lower for education or IRAs accounts. An alternative approach would be to work with a registered investment advisor or asset management company that operates on a fiduciary basis.
Real Estate Investment
The business of buying, renting and selling buildings or lands is pretty much as old as mankind itself. There are several ways to make money from real estate investment but it generally boils down to either
- Developing a land or building( or both) and selling it for profit
- Owning a building or land and letting others in exchange for rent or lease payments.
For a lot of investors, investing in real estate has been a path way to wealth because it capitalizes on the use of leverage. This can be bad if the investments goes haywire, turning out to be a poor one, but, when applied to the right investment, at the right time, on the right terms, it gives norm to someone without a lot of net worth to rapidly accumulate resources, controlling a larger asset base than he or she could otherwise afford.
This is crazy:
Like stock, real estate can also be traded. I know this sounds confusing and crazy but Hey! It does happen. This is usually done through a corporation that possesses the qualities of a real estate investment trust, or REIT. For example, you can invest in office building REITs and collect your share of the revenue from organizations that use the office space regularly or occasionally. There are numerous distinct varieties of REITs, hotel REITs, storage unit REITs, apartment complex REITs, REITs that specializes in office building, parking garage REITs and even senior housing.
The Second investing step is deciding where you want to hold those assets: Let’s do a little recap; we’ve looked at the type of investment and its general categories.
After you’ve learned about the type of investment, general categories of investing and ways by which they can be acquired, the next big thing is: where those investment will be held. This decision if made positively or negatively will influence hugely how your investments are taxed; therefore it’s not a decision to be lightly. Your choices include but not limited to taxable brokerage accounts, Roth IRAS, SEP IRA, family limited partnerships and traditional IRAS. Good tax planning especially in your career can mean a lot of extra wealth down the road as the benefit pile up.
Let’s dive briefly into some of broad categories
- Taxable account: If you decide to go for type of account, you will pay taxes along way, but your money is not nearly as restricted. An example of taxable account is a brokerage account. You can spend your cash anytime and in ways you want to. You can cash it all out and buy a house. You are allowed to add as much fund as you desire to it each year, without restrictions. It is supreme in flexibility but you have to give the American government his cut.
- Tax shelters: Retirement plans offer different benefits. Example of this plans 401(k) or Roth IRAS. Some are tax differed, this means you get a tax deduction at the time you deposit initial capital into the account, and then pay taxes into the future, giving you tax-deferred growth year after year others are tax-free, meaning you don’t get a tax deduction (they are usually funded with after-tax dollars).
Want to know the best part you’ll never pay on the investment profit generated within the account nor on the money once you withdraw in later in your life
Some retirement account and also provided or contain asset protection benefits. For example some have unlimited bankruptcy protection, meaning if you suffer a disaster or an event that wipe of completely your personal balance sheet and forces you to declare bankruptcy, your retirement savings will be out of reach to creditors. Others have limitation on the asset protection afforded to them, but still reach into the seven-figures.
Trust or other Asset protection Mechanism: Additionally, you can hold your investment through structure or entitles such as trust funds. There are various planning and asset protection benefits of using these special ownership methods, especially if you want to limit how your capital is used in a particular way. And if you have a lot of operating assets or real estate investments, i advice you to speak your attorney about setting up a holding company.
An Example of how a new investor might start investing
Now that the basic concept has been well discussed, let’s look at how a new investor might actually start investing.
Firstly, assuming you work for someone the best option would be probably sign up for a 401(k), 403(b), or other employer-sponsored retirement as quickly as possible. Majority of employees offers a 100 percent match on the first 3 percent of salary, and you earn $100,000 per year, that means on the first $3,000 you have withheld from your pay check and kept in your retirement account, your boss will deposit into your retirement account an additional $3,000 in tax-free money.
You will need to invest the money you put in the account whether your employer offers or does not offer you matching. It is very possible that your 401(K) will probably have a default option, but choose the mutual funds or investment vehicles that fit into the needs of your future. As money gets automatically accumulated in your account with each pay check, it will be put toward that investment.
Secondly, let’s assume you fall under the income limit eligibility requirements, you’ll probably want to fund a Roth IRA up to the minimum contribution limits allowed. That is $5,500 for an individual who is younger than 50 years old, and $6,500 for male or female who is older than 50 years old. You can each fund your own Roth IRA if you are married- be sure to invest the money ($5,500 base contribution + $1,000 catch-up contribution) you save in there- Normally, IRA providers will park your money in a safe, low-return device like a money market fund until you decide on what you want to use it for- you may want to put your money toward mutual fund, ETFs or other investments.
With that out of the way, you’d want to return to your 401(K) and fund the remainder (exceeding the matching limit you already funded) to whatever overall limitation you are allowed to take advantage of that year. Once you’ve taken care of this, you might begin to add taxable investments to your brokerage accounts, perhaps participate in direct stock purchase plans, acquire real estate, and fund other investment opportunities.
The next investing step is to decide how you want to own these assets
Once you’ve settled on the type of asset you want to own, the next step is to decide how you are going to own it. To better understand this step, let’s look at business equity. You can either decide
- You want a stake in a publicly traded business
- Own the shares out rightly or completely
- Through a pooled structure
|Outright Ownership||Pooled ownership|
|If you opt in for this type of ownership, you are going to be purchasing shares of individual companies directly. To minimize risk, this requires a certain level of knowledge.||A huge amount of normal investors do not invest in stocks directly but, instead, do it through a pooled mechanism, such as a mutual fund or an exchange traded fund(ETF). You mix your money with other people and buy ownership in a number of companies through a shared entity/structure.|
|In simple terms, this means focusing on the price you are paying relative to the risk-adjusted cash flows the asset is generating.||These pooled tools can take up many forms. Some wealthy investors invest in hedge funds, but most individual investors will opt for devices like exchange-traded funds and index funds, which makes it possible to buy diverse portfolios at a much cheaper rate you can afford on your own.|
|Learn how to calculate enterprise value, operating profit margin, and the gross profit margin, and compare them to other business in the same sector or industry. Read the balance sheet and the income statement. Look at the asset management company; which holds larger stakes to figure out the types of co-owners with which you are dealing.|
Investments managed efficiently could very well increase your odds of retiring comfortably drastically. Investing for beginners is not gambling-in fact it takes time.