If you’re not a seasoned investor, the world of investments can seem intimidating. Between the confusing jargon and the constantly changing nature of the markets, many people choose to put off investing.
But saving for future goals, like retirement, simply isn’t enough. You need to invest those savings to maximize your money. Here’s a crash course in investment markets to help you feel confident and prepared to make long-term financial decisions.
What is a “market”?
Markets are financial marketplaces where investors buy and sell investment assets. There are numerous platforms to aid you in participating in investment markets. Before diving in headfirst, you should have a basic understanding of the most popular investment assets — stocks and bonds — both of which are available through a variety of markets.
What is the stock market?
Stock refers to a share of ownership in a company or corporation. Stock investors receive a return on their investment when the company is doing well. However, they run the risk of seeing a loss if the company is performing poorly or if the stock market takes a dip.
The stock market is used to trade public stock. Stock trading is done through physical and virtual exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq. External influences like economic conditions and political stability can affect the stock market as a whole. Many factors go into buying and selling individual stocks, but the primary focus tends to be the potential for company profits in the future.
How to invest in the stock market
There a few ways to invest in the stock market depending on your timeline and tolerance for risk.
If you have several decades before you’ll need your funds and are comfortable with a higher level of risk, you may choose to be more aggressive with your investments. If you have less time to invest in the stock market or want to minimize your level of risk, you’ll want to err on the conservative side.
There are a variety of investment accounts and avenues you can take to invest in the stock market.
Use employer-sponsored 401(k). Designate regular contributions based on your financial goals and budget. Be sure to take advantage of this option especially if your employer offers a matching program.
Open an individual retirement account (IRA). Choose between a Roth IRA or traditional IRA depending on how you want your money to be treated – primarily, whether you prefer contributing pre- or after-tax dollars.
Buy individual stocks. If you want a more hands-on approach, you can opt to purchase individual stocks as you see fit. You’ll need to pay attention to industry trends and stay educated on any companies that you’re buying stock in.
Keep in mind that there’s no guarantee that you’ll receive a return on your stock investment. Nor is there a guarantee that you won’t experience a loss — potentially a substantial loss — that could directly affect your retirement plans or overall financial standing.
What is the bond market?
A bond is a massive loan usually issued by a corporation or government entity. Bonds provide fixed payments to the investor for a specific length of time, making them a low-risk investment.
Investors use the bond market to trade various forms of debt — specifically bond, credit or debt securities. It’s also referred to as the debt or credit market. Unlike the stock market which has various exchanges, bond trading primarily happens privately between a broker and the creditor.
How do bonds work?
The bond market is influenced by economic growth and inflation. It moves based on how much investors expect inflation to affect the value of their fixed payments. In general, the higher the expectation of inflation, the fewer investors will pay for bonds. Whereas, the lower the inflation expectation, the more they will pay.
By buying a bond, you’re lending money for a certain time and charging interest. Because bonds provide a steady payment over time, many investors use bonds to balance their portfolio for long-term needs, like retirement or their child’s future college tuition.
Bonds are generally safer than stocks because you won’t lose your investment unless the borrowing entity defaults. However, they typically yield a lower return than stocks. There’s also the potential to lose out on growing your investment if the interest you are earning doesn’t outpace inflation.
Exploring investment markets can help diversify your portfolio and grow your money over time. When moving forward with investments, be sure to balance your financial timeframe, your interests and your tolerance for risk to find the right investments for you.
A financial coach at The Gym can offer more guidance about your investment strategy. If you want to know more about your options, schedule a consultation for a plan on how to invest in the markets.