Knowing where to begin when you start investing can be confusing. There are lots of ways to get started, whether you decide to pick the stocks yourself or to go with a company’s managed funds. Here is a description of the most common ways of investing.
Index funds are an easy way to get started with investing. They replicate the stocks and shares of an index, such as the S&P500 or the NASDAQ. There are also regional index funds, like Asia Pacific or UK indexes. If you would like to start investing in the Asian market because you believe there is some potential strength there, doing so through an index fund will balance your exposure compared to individual stock picking. Index funds have a lower management fee than actively managed funds, that will give you a greater return if both perform the same. You can choose to invest a lump sum, or regularly add to your investment, a strategy called dollar cost averaging. By investing $100 every month for example, you will invest when the price is low, and when it is high, averaging a balanced middle over the course of several months or years.
Managed funds are like index funds in the sense that they are a diversified portfolio, but do not follow a particular index, they are picked by a fund manager. They may outperform the market, or underperform. Make sure you do your homework on the history of the fund. What were the returns in the past? How do those returns compare to the performance of the S&P500 or the index fund most similar to them? Nothing is certain in the future, but a previous track record can tell you a lot about the fund. Managed funds also generally have a yearly management fee that comes in deduction of the returns.
Individual stock picking is not as passive as the previous two options. You will need to study how a company has been doing over the past few years before you decide to buy its stocks. It can be very lucrative if you pick the right stocks, but you could also lose money if you make a bad decision. The advantage is that you are the sole decision maker and can hand pick every single stock in your portfolio, while index funds will have top performers as well as below average performers. You can choose whether you prefer to invest in stocks that offer regular dividends payments to their stockholders, or choose a stock based on its potential for appreciation. Have you discovered a great product lately? You could research the company and see if it is publicly traded. Think you will still use the same car company 20 years from now? Why not buy their stocks? Stock picking requires more work but can be very rewarding.
Whatever strategy you choose, make sure you invest only what you can afford to lose should something go wrong.
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