If hearing terms like diversified portfolio makes you want to run for the hills, don't worry – we're here to help you understand some of the basic concepts of investing.
The basics of investing
The most common investment options are mutual funds, stocks, and bonds. Mutual funds are assets pooled with other investors and include a variety of stocks, bonds, and other securities. They offer diversified, professionally managed, affordable portfolios and are often assembled to meet particular investment objectives or strategies.
Stocks are a security that represent fractional ownership in a company. Each unit of stock is one share and the more shares you own, the higher your ownership percentage. Bonds are a form of debt security, which means you are lending to the issuer of the bond when you purchase it. In return, the issuer repays the face value of the bond plus interest at maturity.
Start with a 401(k)
Most employers offer a 401(k) plan and it’s a great way to dip your toes into investing without jumping all-in. Pro tip: Always take advantage of company matches, if available, to get the most out of your plan.
Automate your investments
First, decide how much you are comfortable investing each time. Then, get your contributions on a cycle through paycheck deductions or automatic transfers through your financial institution.
Understand the risk and educate yourself
It’s important to research investments thoroughly before putting money in. You’ll want to look for things like risk, fees, and historic performance. Morningstar is perhaps the most trusted resource for stock market research.
Practice first
Many large finance companies and websites offer free “play accounts.” These are essentially stock market simulators that allow you to create an imaginary portfolio with imaginary money and track the performance. This is a great way to gain an understanding of how the stock market works without having the risk of losing your actual money.
Investing is not a walk in the park, but with the right guidance, research, and planning, it can feel like one. Unsure what some of the terms above mean? Here’s a quick glossary to help you out.
- Diversified: A balanced portfolio achieved by investing in a variety of securities.
- Security: Financial instruments that hold monetary value and can be traded.
- Maturity: The date on which the balance of something becomes due and the principal plus interest becomes payable.
- Interest: The rate paid on a security to an investor, or the rate paid on a loan when borrowing money.
OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy.
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