Investing for Beginners

Here it is! – That thrilling (and insightful) guide to investing for beginners that you’ve been
dreaming about finding all your life.

Well, perhaps we’ll leave “thrilling” to your judgment. However, we are quite confident that
you’ll become more than just a little excited when you learn the truth about the wide array of
opportunities available to you through investing – opportunities you can use to establish
and grow your fortune.

This guide is designed to serve as an informational primer for you in the arena of investing,
even if you’re a complete novice. It’s not a detailed guide to a specific investment (we’ll be
offering those in subsequent publications), but rather a broad overview of different types of
asset classes that you may wish to consider investing in, along with guidance on exactly how
to get started making (lots of) money through investing.

We’re also going to cover some basic principles of investing for beginners – principles that
apply to any type of investment. Learning these principles will significantly help you to
maximize your investing success and profitability.

Introduction to Investing for beginners

Before we get going with investing for beginners in earnest, a gentle suggestion… relax. The
field of investing is a large one, and there’s virtually an infinite amount of things to learn
about investments. The best, most successful investors will tell you that they are continually
learning and continually honing and expanding their skills at making money in the financial
markets.

You can’t learn everything there is to know about investing, or even just investing for
beginners, in one day, but fortunately, you don’t need to do that in order to begin a career as a
successful, profitable investor.

One of the most glaring holes in our educational system is the lack of even basic education in
the areas of personal finance and investing. One of the most successful traders in history once
remarked, “If I’d only been taught in high school what I later managed to learn on my own
about investing, I likely could have retired wealthy by age 35.”

Perhaps that’s a somewhat “optimistic-in-hindsight” estimate of investing success, but there’s

no doubt that anyone can potentially reap massive financial benefits from simply taking the
time to learn the basics about investing as early as possible in life.
So be thankful if you’re reading this guide at age 16, but don’t be discouraged if you’re
already well past high school age, or even middle age. It’s not too late to begin building a
fortune through investing, and the sooner you start, the sooner you’ll move well beyond
investing for beginners and achieve your financial dreams.

There are two truths we’d like to stress to you at this point: One is the fact that taking the
time to acquire even a very rudimentary knowledge of investing, whether at sixteen or sixty,
will put you well ahead of your peers in terms of financial literacy, and ultimately, in terms of
financial success.

The second truth comes from one of the richest commodity futures traders. This wise, older
man confided an important “secret” about investing and wealth – “You can make a lot more
money a lot faster by sending your money to work for you every day, rather than just sending
yourself to work every day”.

And that’s all investing is: Putting your money to work for you making more money.

Basic Types of Investing

This is the building block of investing for beginners. There’s an endless list of specific
investments you can make, but nearly all investments fall into one or the other of a handful of
categories commonly referred to as “asset classes”. An asset class is made up of investments
with similar characteristics that are also usually governed by the same set of financial
regulations.

Asset Classes

The asset classes that most people are familiar with are as follows:

1) Equities/Stocks
2) Fixed Income investments/Bonds
3) Cash or cash equivalents, such as money market funds

There are several other asset classes you may wish to explore investing in at some point,
which including the following:

1) Commodities and futures, such as oil or gold

2) Alternative investments, which include real estate, foreign exchange (forex), and
collectibles
3) Sustainable, Responsible and Impactful investments (SRI) with a primary focus on
beneficial social or environmental effects

NOTE: Generally speaking, alternative investments tend to be less liquid than more
traditional asset classes. Stocks, for example, are an extremely liquid asset, whereas a private
equity investment may require tying up your investment capital for a minimum period of five
to seven years.
 

Equity Investing

Equity investing, the buying and selling of stocks in publicly traded companies, is what most
people probably think of when they hear the word “investing” and is a popular investment for
beginners.

Publicly-traded companies offer investors an equity interest in the company through the
purchase of stock shares. For example, if shares of Advent Wireless (AWI) are trading at
$1.28 per share, then you can buy 100 shares for $128.00.

By selling shares, companies are able to raise capital to help them grow or expand.

Stock investors may buy stocks to profit from increases in a stock’s price; sell stocks to profit
from a decrease in the stock’s price; buy or sell options on stocks or stock indexes. Stock
investors may also seek to profit from receiving stock dividends. Dividends can be looked at
sort of like earning interest or a per-share bonus from stocks you own. Dividend.com is an
excellent website for researching and comparing stocks that pay dividends.

Stocks are traded on exchanges such as the Vancouver Stock Exchange (VSE) or the New
York Stock Exchange (NYSE). Exchanges regulate and facilitate the trading of stocks.

The most important factor that determines a stock price is, of course, how well the company
is performing. Other factors that impact stock prices include how well the overall industry the
company is part of is performing, the performance of competitors, economic conditions, and
government actions.

Stock investors are usually guided in their investment decisions primarily by either technical
or fundamental analysis. (For more on technical and fundamental analysis, see the section on
“Principles of Investing – Technical and Fundamental Analysis”)

There is a wealth of freely available information online for stock traders at websites such as
Morningstar.com, Yahoo Finance, and Zack’s Finance.

In addition to this investing for beginner’s guide, check out our online finance courses.

Fixed Income Investing for Beginners

Fixed income investing refers to investments in debt securities that offer investors fixed-rate
interest payments over a specified time frame – the life of the debt security. Debt securities
are most commonly referred to simply as “bonds”. The bond market is one of the largest
markets worldwide, thanks in part to the massive amount of debt being carried by most
governments.

When you purchase a bond you are providing financing for a company or a government, and
in return, you receive a specified interest rate, known as the “coupon rate”. Interest on bonds
is typically paid either semi-annually or annually until you receive the bond’s full principal
amount back on the bond’s specified maturity date.

The coupon rate is the yield offered on the bond at the time it is issued. As interest rates
fluctuate up or down over the life of a bond, the value of the bond, and its actual “yield to
maturity”, change. Coupon rates do not change over the life of a bond, but changing interest
rates do affect the bond’s value and yield. As interest rates rise, bond prices fall; conversely,
as interest rates fall, bond prices rise.

For investors who hold bonds to maturity, fluctuating yield to maturity rates during the life of
the bond have no practical impact on their investment return. The current yield to maturity
rate only comes into play if you are buying or selling a bond in the secondary market
sometime prior to its maturity date.

The primary appeal of fixed income securities is their relatively low risk. If you’re buying
bonds issued by a major country such as the United Kingdom, making the specified return is
virtually guaranteed.

Zero-Coupon Bonds

Some bonds are issued as “zero-coupon bonds”. Rather than offering regular interest
payments, zero-coupon bonds are instead sold at a significant discount from the bond’s face
value. Investors make a return by purchasing the bond for less than face value and then
redeeming the bond at maturity for full face value. (For example, a zero-coupon bond with a
face value of $5,000 might sell for $4,500. The investor pays $4,500 to buy the bond, and
then at maturity sells, or redeems, the bond at the face value of $5,000, thus making a $500,
or 10%, return on their investment.)

Bond Sellers – Governments and Corporations

Bonds are sold by national, state, and municipal governments. Municipal bonds are very
popular because many municipal bonds earn interest tax-free.

In addition to governments, corporations also issue bonds to obtain financing. Corporate

bonds frequently pay higher interest rates than similar government bonds, but they also carry
more risk. Corporate bonds are also typically more volatile than government bonds because
their value can be affected by the perceived value of the corporate issuer.

Fixed income investments may appeal to investors planning retirement who have large
amounts of investment capital available during their working years. Such investors can
purchase a large amount of bonds, collect interest payments while they are working, and then
around the time of their retirement, the bonds mature and return the principal (face value) to
the investor.

To learn more about investing in bonds you can access helpful educational resources at
Bankrate.com.

 
Other Asset Classes – Commodities, Forex, and other Alternative Investments

We don’t have enough space here to provide an in-depth look at every asset class – this is,
after all, only intended as an overall investing for beginner’s guide. (But you can look
forward to future material from us on Alternative Investments.) However, we can at least
make some basic remarks about other asset classes.

One of the most common attractions and potential benefits that alternative assets, such as
commodity futures and forex trading, offer is that of increased leverage – the ability to use a
relatively small amount of investment capital to control a relatively large investment. For
example, commodity futures trading typically offers leverage in the neighborhood of 10:1. In
other words, to invest in a standard 100 troy ounce gold futures contract usually requires a
margin deposit of only 5-10% of the total value of the contract.

In short, leverage offers you the ability to make a lot of money with just a little money.
However, leverage applies to both positive and negative investment outcomes. Just as
leveraged investments amplify profits, calculated as a percentage of required investment
capital, they likewise amplify losses. Investing in leveraged investments requires careful
money management. Unlike buying stocks or bonds, where the absolute maximum possible
loss is no more than your total investment, with leveraged investments it is possible to lose
more than your total investment. Investors who are unfamiliar with trading leveraged
investments often see their trading capital erode at an alarming rate.

Leveraged investments, used wisely, can be an excellent vehicle for rapidly growing your
investment capital. But to successfully take advantage of such investments, you have to
clearly understand the associated risks.

We are not advising you to avoid leveraged investments altogether, but we are very strongly
cautioning you to make certain before trading them that you fully understand the implications
of using high amounts of leverage.

Principles of Investing for Beginners – Risk and Opportunity

One of the basic principles of investing for beginners is this – risk and opportunity go hand
in hand. They increase or decrease in conjunction with each other. Investments that offer
higher potential profit carry correspondingly higher levels of risk. Likewise, investments
that offer a lower potential return on investment (ROI) typically offer greater security and
less risk.

For example, a cash equivalent investment, such as a certificate of deposit (CD), offers a very
low, but guaranteed, rate of return. Such investments are appropriate for individuals with a
very low-risk tolerance, who are more concerned with protecting their investment capital
than with growing it. In contrast, equities offer a substantially higher potential rate of return –
up to 10% or more annually – but also carry a much greater degree of risk. There is no
guaranteed return with equity investing.
Because of the correlation between risk and potential return, investors need to carefully
consider their risk tolerance when selecting investments – how much risk you’re willing to
accept in return for the opportunity to realize “X” amount of profit.

It’s also important to think about your personal investment goals – the reason for your
investment choices. An investor who is looking to generate a second income through
investing, or amass a large enough fortune to retire on, will make much different investment
choices than an investor who is merely seeking to earn a little interest to help offset inflation
and protect his or her purchasing power.

Principles of Investing – Fundamental Analysis

In analyzing investments, investors tend to fall into one of two camps – those who make their
decisions based on technical analysis and those who primarily utilize fundamental analysis.

Fundamental analysis refers to analysis based on economic data or reports, such as the
monthly Non-Farm Payroll (NFP) report in the United States, considered an important
indicator of the overall health of the economy and, more specifically, of job growth.

Along with major economic reports such as the Producer Price Index (PPI) and Gross
Domestic Product (GDP), fundamental stock investors evaluate stocks based on the
information contained in a company’s financial statements and earnings reports (often
reported as “earnings per share”, or EPS). Investors also examine various financial ratios,
such as the debt/equity ratio or price/earnings ratio, to evaluate a company and its stock price.

Principles of Investing – Technical Analysis

Many investors prefer to rely on technical analysis in making investment decisions. Technical
analysis evaluates a security not based on fundamental economic or company information,
but rather on price and trading action in the market. Technical analysis utilizes price charts,
patterns, technical indicators, and market activity (such as volume of trading) in order to
predict a security’s probable future price movement.

Technical analysis is often favored by short-term or day traders. Long-term investors who
buy and hold securities tend to rely more frequently on economic fundamentals, but over the
short-term – trading within a single trading day – such fundamental factors may have less
impact than technical factors on the price movement of a security.

Of course, some investors combine fundamental and technical analysis in making their
trading decisions. An investor in gold futures might, for example, make a buy or sell decision
based on economic fundamentals, but choose specific price entry and exit/target points based
on technical analysis.

Principles of Investing – Invest REGULARLY

Most people fail to realize how quickly they can develop a sizeable investment account
simply by making modest but regular investments. It’s the magic of compounding that
performs this “trick”. Here’s an illustration of compounding at work:

Assume you open an investment account with an initial $5,000 investment, and that the
account provides a 12% annual return on investment. You make no further deposits to the
account. In 10 years, the account will have grown to a bit over $15,500 – not a bad
performance, more than tripling your money.

But now assume that you make one very small adjustment – contribute just an additional $50
every month to the account. Figuring in $50 monthly contributions, in 10 years your
investment account will have grown to $27,300 – almost double the account size that you’d
have had without making any additional contributions. If you bump those monthly
contributions up to $100 per month, then the 10-year account total would balloon to over
$39,000…and all from an initial investment of just $5,000, followed by making very modest
additional contributions on a regular basis.

The habit of regularly investing even small amounts of money is definitely a habit worth
cultivating, a habit that will pay off handsomely for you.

(By the way, thanks much to Dave Ramsey’s free compounded investing calculator – a
helpful tool that made the above calculations very easy to do.)

A Special Investment Vehicle: Exchange-Traded Funds (ETFs)

This is an important section of investing for novices. Exchange-traded funds (ETFs) have
become an increasingly popular investment instrument over the past few decades. ETFs are
similar to mutual funds in that they utilize the combined investment capital of a number of
individual investors. ETFs offer a significant liquidity advantage over mutual funds because
they can be bought and sold at any time throughout the trading day, just like individual
stocks. In contrast, mutual fund shares can only be bought or sold at the end-of-day closing
price.

ETFs also typically offer lower fees than mutual funds, thereby reducing trading costs and
increasing total net profitability.

The popularity of ETFs is also enhanced by their versatility as investment vehicles. ETFs can
be used to invest in virtually any type of security or asset class.

ETFs may contain a portfolio of transportation, banking, or healthcare stocks. There are bond
ETFs that hold a diversified portfolio of bonds with varying interest rates and maturity dates.
ETFs are available that hold physical gold or silver for investors wishing to invest in precious
metals but who prefer to hold ETF shares rather than physical metals.

Even forex currency pairs can be accessed with ETFs, as can other alternative investments
such as hedge fund or private equity investments. ETFs also offer investors the ability to
invest in portfolios that reflect popular stock indexes.
The desirability of ETFs as an investment vehicle is reflected by the explosion of ETFs
created by major brokerage firms such as Vanguard and Fidelity Investments. The amount of
funds committed to ETFs grew by half a trillion dollars in 2016 alone. The websites etf.com
and etfdb.com offer lists of available ETFs in different investment categories, along with
thorough fundamental and technical analysis of each fund’s performance and articles on
specific trading strategies using ETFs.

Investing for Beginners Conclusion: Invest in an Education in Investing

Investing is a skill – part art and part science – a practice you engage in and employ to make
money. As with any other skill, from dancing to juggling to golf, there are lots of things to
learn and it takes time to develop your skill as an investor.

Can anyone become a good,  successful investor? We firmly believe that they can – that YOU
can. It’s really just a matter of making a commitment to learning what you need to know
(such as how to use technical indicators) and then working diligently to apply the knowledge
and skills that you obtain.

You may choose to start off investing in some ETFs that track major stock market indexes,
and then move on within a few years to becoming a private equity investor. You might be so
strongly drawn to investing that it becomes a career for you, and you end up working as an
investment analyst, a financial advisor, or a hedge fund manager.

For now, go ahead and congratulate yourself for making a positive, healthy change in your
life. Simply by choosing to read this guide, you’ve taken a significant, positive step toward
creating a second income stream for yourself.

Let yourself start imagining how, from now on, even when you aren’t “at work”, you’re still
going to be generating additional income for yourself as your money is busy making more
money for you. Regardless of whether you turn out to be a “market wizard” or just an average
investor, five years from now you’re going to have a LOT more money than you would have
if you hadn’t chosen to follow this road to wealth.

Investing for Beginners – How to Get Started

Here are some ideas on how to proceed right now:

 Start crafting your investment plan. Determine how much capital you have available
to initially fund your investing account, along with what you can do in terms of
adding to it with regular contributions. Calculate how much you can reasonably afford
to contribute to your investment fund on a regular basis. Decide whether you want to
make weekly or monthly contributions. Here’s a tip to help you stay on track: After
deciding on the amount and frequency of your additional investment contributions,
simplify things (and avoid the temptation to skip making contributions) by setting up
automatic fund transfers from your checking, savings, or other accounts to your
investment account.
  Begin tracking any and all expenses associated with pursuing your education in
investing, because they’re all potentially tax-deductible. Investing is, in effect, going
to be your new “home business”, and it’s important to keep accurate records of your
expenses so that you can maximize your net investing profit by appropriately
deducting them.
 After reading this guide, you may already have an idea of what type of investments
seem the most appealing to you. If, for example, you like the idea of using ETFs, then
consider checking out a popular creator of ETFs such as Fidelity Investments, along
with looking at ETF information and analysis sites to learn more about ETF investing.
 Let’s briefly repeat something that we remarked on near the beginning of this guide:
It’s impossible to learn everything about investing in one day, so just relax and don’t
overburden yourself. However, from this day forward, it may help to think of yourself
as enrolled in the “University of Investing”, working toward earning your doctorate
degree in “making lots of money”. In addition to specifically studying whatever
investment vehicle or asset classes you decide to concentrate your investing efforts on
initially, set yourself a course of self-study to become knowledgeable in the field of
finance and investing.

Educational Aids for Investing – Books, Periodicals, Courses

In addition to this investing for beginner’s guide, there are numerous books you can read to
enhance your knowledge and understanding as a savvy investor. Two perennial favorites of
financial professionals are Benjamin Graham’s “The Intelligent Investor”, long considered
the “bible” of value investing, and “Reminiscences of a Stock Operator”, a very entertaining
and educational, fictional biography of the man known as “the greatest trader who ever
lived”, Jesse Livermore.

Check out CFI’s recommended reading list here.

Consider subscribing to at least one of the major financial newspapers (the Financial Post,
Financial Times, the Wall Street Journal, or Investor’s Business Daily) and explore shows
offered on financial news television networks.

Be sure to take advantage of the wealth of courses, articles, and other materials that you can
find right here on our website. We will, of course, be publishing additional material that will
delve more deeply into subjects such as technical analysis and equity valuation.

We wish you all the best on the road to wealth and good fortune.

To jumpstart your investing, check out our free finance classes online!

More helpful resources

This has been a guide to investing for beginners and we hope you’ve found it helpful.  To
keep advancing your career, check out these helpful resources below:

 Financial modeling for beginners

 Technical analysis beginner’s guide
 Finance career map
 How to be a great financial analyst