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Securities 101: Why You Should Consider Investing and How to Invest
- Written by:
- Baylor Cox
- Reviewed by:
(Coming Soon)
Why should I consider investing?
Investing can help you grow your wealth, achieve financial goals, and secure your financial future. You should consider investing for several reasons, including the following:
- Grow Your Money: Investing allows your money to grow over time through various vehicles appropriate for your individual needs. These can include stocks, bonds, and mutual funds, which may offer higher returns than traditional savings accounts. However, investing involves risk, and you should evaluate your financial situation carefully before proceeding.
- Save for Retirement: Investing in a retirement portfolio, such as a 401(k), helps you save for the future and provides income from your investments during retirement.
- Earn Higher Returns: Investments with higher return potential can help you achieve major financial goals like buying a home, starting a business, or funding education.
- Build on Pre-Tax Dollars: Contributing to certain retirement accounts (like 401(k)s) with pre-tax dollars can reduce your taxable income and increase your overall savings.
- Qualify for Employer Matching: Participating in employer-matched retirement plans allows you to maximize your savings by taking advantage of additional contributions.
- Support New Ventures: Investing in startups or new products can be exciting and help create jobs and opportunities.
- Reduce Taxable Income: Investing in retirement accounts or incurring investment losses can help lower your taxable income.
- Compound Growth: Long-term investing allows your money to grow through compound interest, which can significantly increase your wealth over time.
- Financial Independence: Investing can help you achieve financial independence by providing passive income and protecting your wealth from inflation.
What is securities trading?
Securities trading refers to the buying and selling of tradable assets such as stocks, bonds, and other financial instruments. Traders aim to generate profits through strategic purchases and sales, often working independently or as part of a firm such as an investment bank or private equity company.
What is a “security” and what are the different types?
A security is an investment instrument, like a stock or bond. Common types include:
- Stocks (Equities): Represent ownership in a company and offer potential capital gains and dividends.
- Bonds: Represent debt obligations that pay interest and return principal at maturity.
- Mutual Funds: Pooled investments managed by professionals, offering diversified exposure.
- Exchange-Traded Funds (ETFs): Funds traded like stocks, often tracking indexes or sectors.
- Real Estate: Direct property investments or through Real Estate Investment Trusts (REITs).
- Commodities: Physical goods such as metals, energy, or agricultural products.
- Cash & Cash Equivalents: Highly liquid, low-risk assets like money market funds or savings accounts.
What is the difference between saving and investing?
Saving involves placing money in low-risk, liquid accounts (e.g., savings or money market accounts) to preserve capital with modest returns. These are usually insured and stable.
Investing, by contrast, means placing money into higher-risk assets like stocks, bonds, or real estate to generate long-term growth. While potentially more rewarding, investing comes with the risk of losing principal.
What is risk tolerance?
Risk tolerance is the level of risk an investor is comfortable accepting due to the volatility of investments. It’s influenced by factors like age, income, financial goals, and investment time horizon.
What is a stock index?
A stock index is a statistical measure that tracks the performance of a group of stocks, typically representing a market segment or sector. It is used as a benchmark to evaluate performance. Common examples include the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average.
What happens when you buy or sell a stock?
When you buy a stock, you purchase ownership in a company. The money goes to the seller (not the company), unless it’s an initial public offering (IPO).
When you sell a stock, you’re transferring ownership to another investor. The stock price is influenced by supply and demand: prices go up as more people want to buy, and down as more want to sell. Market conditions, company performance, and economic news all play a role in price movements.
How are stock prices determined?
Stock prices are determined by market supply and demand. Influencing factors include:
- Company earnings and financial health
- Industry and market trends
- Investor sentiment
- Economic indicators and global events
Prices adjust constantly as investors react to new information.
What is an Exchange-Traded Fund (ETF)?
An ETF is an investment fund traded on a stock exchange. It typically tracks an index, sector, or asset class (like stocks, bonds, or commodities), and offers diversified exposure through a single tradeable security.
What are dividends?
Dividends are cash payments from a company to its shareholders, usually from profits or retained earnings. Key points include:
- Usually paid in cash (e.g., by direct deposit or check)
- Often issued quarterly
- Can be fixed amounts (e.g., $2/share) or percentages of stock price
- Not guaranteed — issued at the company’s discretion
- Allocated based on shares owned
- Not recorded as an expense, but deducted from retained earnings
- Preferred stockholders may have priority in receiving them
Dividends offer a return on investment and a form of income for shareholders.
