Investing is defined as “the outlay of money usually for income or profit.” The idea behind investing? Put your money to work for you in something you believe will increase in value over time. Investing your money in the stock market may seem like a foreign concept; how do you know which funds to invest in? How does trading actually work? And what the heck is a mutual fund?
There are some gender differences, too. Men are generally more confident about investing, while women are more goal-directed and trade less. Women tend to keep 10 percent more of their savings in cash than our male counterparts. Millennial women report a lower level of financial comfort. On average, we are less likely to feel “in control” or “confident” about our financial future. And, women generally have a smaller total invested when we retire —all because we earn less.
With this in mind, it's important to encourage women to become first-time investors. Instead of stashing money in your savings account, put it to work and invest in stock, develop a portfolio, learn about real estate, etc. But where to start? I’ve got you — the 21 items below serve as your investing for beginners guide.
1. Investing builds wealth.
Is there anything more powerful than the idea of your money making money for you, without you lifting a finger? That’s at the heart of investing.
The power of compound interest means that the earlier you invest, the sooner your investments start growing and making money on your behalf. This builds your wealth far more rapidly than saving in a checking account.
Did you know you can start investing in stocks with as little as $500-1,000? So you don't need to be making bank to get going!
2. The market is where companies go to attract investors.
When people talk about investing in “the market,” what are they referring to? Today’s markets are largely exchanges — like the New York Stock Exchange (NYSE) — that allow us to buy and sell investments to others. You’ve seen photos of business executives and celebrities “ringing the bell” to open the NYSE, but it’s not the only market; others include the NASDAQ, London Stock Exchange and many others.
The market is a general term for spaces where companies go to attract investors, and where investors buy and sell with each other.
3. Investing allows you to own a portion of a larger business.
Buying stock is like purchasing a little slice of a company. Say you buy stock in consumer goods company P&G (manufacturer of Tide, Crest, Dawn, Tampax and many other household names); that stock costs $90.98 per share at the time of this writing. If you buy that share, you are betting that P&G will continue to grow and make money. P&G uses your $90.98 to invest in its business; open new locations, fund new products, hire new staff, etc.
4. Owners make money when the businesses they own make money.
Companies that offer stock to investors (like P&G) often give investors some of the money they earn. Every three months, these companies tell investors how they are doing by issuing financial statements.
If they are doing well (taking in more money than they spend, which is called profit), they will often give a portion of the money to investors. These payments, called dividends, can be re-invested or cashed out by investors.
5. You need an investment account to invest in the market.
Investment accounts are offered by financial services companies (like Vanguard, Charles Schwab and Fidelity) and allow you to buy stocks and other investments. Once you’ve determined what to invest in, it’s easier to select the right investment account.
6. Investment accounts come in several forms.
There are several types of investment accounts, designed for different purposes.
Retirement accounts are for the future and include 401(k) and IRA accounts. These typically include penalties if you access them before retirement age, and the government often gives you tax breaks on them to encourage investing.
Regular investment accounts are often referred to as brokerage accounts. These aren't necessarily for retirement, so you can add or withdraw your money as you see fit. These don't have special tax benefits (unlike many retirement accounts.)
7. 401(k) accounts are provided by your employer help you save for retirement.
Retirement accounts, like a 401(k) or 403(b), can only be offered through your employer. They are named for the section of the Internal Revenue Code that outlines how they work.
401(k) plans can be offered by private companies. Similarly, 403(b) plans can be offered by public education employers, some non-profits and the like.
If you have one of these accounts, your employer will deduct a percentage of your salary from your paycheck every month and put it in this account. Some employers match employee contributions up to a certain amount so they're a great way to start investing.
8. IRA accounts are for you to save for your retirement.
While 401(k) plans are offered by employers, a Roth or traditional IRA is available to anyone that earns an income. This helps those that work for companies that don't provide a 401(k) benefit, as well as those who want to invest more for their retirement.
You have to open this account for yourself at a qualified bank or broker, like Vanguard or Fidelity.
Traditional IRAs are funded with wages that you have already paid taxes on. However, depending on your income, you may be able to deduct your contributions from your taxes.
9. Certain IRA accounts (Roth IRAs) allow you to access money in the future, without taxes.
Roth accounts are funded with money that has already been taxed, so you do not owe the government any taxes when you access it in retirement.
Some people prefer Roth accounts because they like the predictably of knowing they will not be taxed in the future. Regardless of whether you prefer a Roth or Traditional IRA, the most important step is to begin investing. Either would be better than neither!
10. You need to fund your investment account in order to buy investments.
Once you have selected both the type of account you are focused on (IRA, 401(k), brokerage) and the financial services provider (Vanguard, Fidelity, Charles Schwab), you need to fund the account by putting money in.
If you are just starting to invest, you can call the financial services provider or go to their website to send them your money and open your account. This money will sit in the investment account in cash until you decide which investments to purchase.
11. It is very, very hard to pick the right stock to buy.
All this knowledge is useless if you don’t put your money to work for you by selecting an investment. This is where many women, especially ones wanting to know all the details, can face analysis paralysis.
Since a stock is like purchasing a little slice of a company, many people like to analyze company information (financial performance, industry trends, competitive landscape, emerging regulations), and then buy the companies they think will win.
A caution: this is very, very difficult to do. If you are buying individual stocks, it is very challenging to consistently make money.
Think about it; as an individual investor, you need to be educated enough to buy only the stocks that will continue to pay dividends OR buy (and sell) the right stocks at the right time, when they increase in price. And you’re competing with everyone else who watches the market — including professionals.
One of the money mistakes I made was trying my hand at purchasing individual stocks. I have shared how that worked out - disastrously - for me. There are over half a million companies you can invest in on public exchanges. How will we pick the right ones to buy stock in? Read the next steps to learn how.
12. Mutual funds allow you to buy many companies in one purchase.
Mutual funds are one investment vehicle that allows us to buy many, many stocks in just one purchase. I prefer these to individual stocks because you can own hundreds of companies in each share.
Many retirement accounts only allow mutual funds, given they offer more companies in each purchase and are generally seen as less risky than stocks.
You do need to invest a minimum of usually around $3,000 initially, but some company's have much lower minimums.
13. ETFs are like mutual funds, but cheaper.
ETFs are my favorite type of investment. ETF stands for Exchange-Traded Fund. Like mutual funds, ETFs allow investors to buy many companies in a single share. They are nearly identical to mutual funds, save for some technical differences (how they are traded and regulated, for example).
I like these better than individual stocks and even mutual funds because they are generally less costly to the investor and have low expense ratios.
14. Investments have costs.
What's the expense ratio? This is how much the company that manages the mutual fund or ETF charges you for their work.
An average expense ratio is around .6% — meaning, for every $100 you have invested, the fund rakes in 60 cents. Sounds small — but tiny fees make a meaningful difference in your wealth over the long term. Vanguard’s average expense ratio is .12% — meaning, for every $100 you invest in a Vanguard mutual fund, they charge 12 cents. That’s much, much lower, and lets you keep more of your hard-earned money.
Are there other fees? It can be costly to create fancy, actively-managed mutual funds. So, look carefully for purchase or redemption fees, or 12b-1 fees (marketing or distribution fees).
You can find these fees easily online when you research your potential investments because companies are required to publish expense ratios and 12b-1 fees to their prospective investors.
Fees are taken directly out of the investment, so you do not see a “line item” of how much they are when your money is invested. This is convenient for expensive funds with high fees.
15. Returns help investors compare performance.
Returns are indicators of how well (or poorly) investments perform. They help investors easily compare performance across different investment vehicles. Returns are expressed in percentages.
For example, if I invested $100 in an ETF that achieved a four percent one-year return, I would have earned $4 in that time period.
You can compare any range of time when looking at returns and compare your potential investment to a few big benchmarks.
Investment returns are from past performance and are not a guarantee of how well they will do in the future. However, they are a useful indicator.
16. Benchmarks like the S&P 500 help compare performance.
How did this fund perform over the last decade, compared to the S&P 500? The S&P 500 is a very common performance benchmark because it includes the 500 largest U.S. companies. If the mutual fund or ETF seriously underperformed the S&P 500, it may not be worthy of your hard-earned money.
17. Review the 10-year return to compare performance.
There are many ways to evaluate investment performance. I recommend using the 10-year return because I like a longer view into performance.
Compare your investments' 10-year return to the S&P 500 10-year return so you can see if you are buying something slightly better than, or worse than, the performance of that group of companies.
Candidly, I keep my investments very simple and largely buy ETFs and mutual funds that match the S&P 500. That works well for me.
Investment experts like Warren Buffett recommend this approach for individual investors and studies show it is very difficult to beat “the market” consistently (meaning, a large benchmarked group of companies like the S&P 500).
18. Target date funds can make investing for retirement easy.
Many financial services providers offer “target date funds” which are designed to help you save for retirement by adjusting over time. These funds buy less risky investments as the target date gets closer.
If you are planning on retiring in 30 years, you would buy the target date fund that is dated 30 years from today.
Keep an eye on the expense ratios and other fees associated with these funds. Many are modest, but I have seen some that are far higher than the average mutual fund (which is .6% industry-wide but .12% for Vanguard funds).
19. Investing is easier when you do it automatically.
I strongly recommend a regular, automatic transfer timed with your payday. Start with whatever you can afford today, and aim to steadily increase it over time.
Automatic investing will ensure you’re always paying yourself first. Let’s take advice from Warren Buffett one more time. “Do not save what is left after spending, but spend what is left after saving.”
20. Investments pay you through dividends and growth.
Investments like mutual funds and ETFs make money for investors in two basic ways.
First, the company may perform well, create profits and pay stockholders dividends from those profits as I outlined above. Dividends are a financial “thank you” for investing in the company.
If you choose to reinvest the dividends you receive and buy more shares, you are creating a powerful wealth-building cycle.
Second, you can make money by selling your stock to someone else. Then, you profit from (or lose) the difference.
21. The best day to start investing is today.
Is there more complexity we could examine? Sure. But, these basics will put you ahead of most that are hesitating to get started due to lack of knowledge or analysis paralysis. Don’t let that be you. Are you ready to get started? Let me know!
The Feminist Financier is on a mission to help women build wealth and own their financial independence, by improving financial literacy and taking the mystery out of money. Ms. Financier is also a shoe addict, travel fanatic, and wine enthusiast.
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