Beginners' Guide to Investing

Investing your hard-earned money can feel overwhelming, but understanding some basic terms can make the process easier. Here’s a simplified overview of essential investing concepts.

• Investment: An asset bought with the expectation that it will appreciate in value over time. Common types include stocks, bonds, real estate, and commodities.
• Risk of Loss: Investments come with no guarantees. Your investment can increase or decrease in value, or you could lose your initial amount. Assessing risk is vital for informed decisions.
• Investment Goal: These are personal objectives that guide your investment choices, such as saving for retirement. Goals depend on factors like age, risk tolerance, and future financial needs.
• Debt Securities: These are loans to companies or governments, like bonds, where you earn interest and get your principal back at maturity. The risk is tied to the borrower’s ability to repay.
• Equity: Represents ownership in a company, typically through stocks. If the company performs well, your investment may grow, but if it struggles, you could lose money.
• Diversification: This strategy involves spreading investments across various assets to reduce risk. If one investment falters, others may perform better, balancing your overall portfolio. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
• Portfolio: A collection of your investments, including stocks, bonds, and cash, aimed at growing value while managing risk.
• Public Company: A company whose shares are traded publicly on stock exchanges. They must disclose financial information to shareholders.
• Private Offering: Securities sold privately to select investors, not available to the general public. These investments may lack liquidity and transparency.

Stock Categories

• Market Capitalization: Companies are categorized by size:
  • Small-Cap: Under $2 billion, often more volatile
  • Mid-Cap: Between $2 billion and $10 billion
  • Large-Cap: Over $10 billion, typically more stable

Common Investment Products

• Mutual Funds: Pooled money from multiple investors managed by professionals, offering diversification across various assets
• Index Funds: These funds track a specific market index (e.g., S&P 500) and are passively managed
• ETFs (Exchange-Traded Funds): Similar to mutual funds but traded like stocks throughout the day, often tracking a market index

Investment Strategies

• Value Investing: Buying undervalued stocks based on strong fundamentals
• Growth Investing: Focusing on companies expected to grow faster than the market, often reinvesting earnings
• Income Investing: Seeking assets that generate regular income, like dividend-paying stocks and bonds
• Dollar-Cost Averaging: Investing a fixed amount regularly, reducing the impact of market volatility. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not guarantee a profit and does not protect against loss in declining markets.

Real Estate & Alternative Investments

• REITs (Real Estate Investment Trusts): Companies that own income-producing real estate, allowing you to invest without direct property ownership. Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
• Precious Metals: Investing in gold, silver, and platinum as a hedge against inflation.
• Raw Commodities: Investing in physical goods like oil or grain, which can be volatile. The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
• Digital Assets: Any electronically stored value, including cryptocurrencies. Cryptocurrency and cryptocurrency-related products can be volatile, are highly speculative and involve significant risks including liquidity, pricing, regulatory, cybersecurity risk, and loss of principal. A cryptocurrency fund may trade at a significant premium to Net Asset Value (NAV). Cryptocurrencies are not legal tender and are not government backed. Cryptocurrencies are non-traditional investments, resulting in a different tax treatment than currency.  Federal, state or foreign governments may restrict the use and exchange of cryptocurrency. The use and exchange of cryptocurrency may also be restricted or halted permanently as regulatory developments continue, and regulations are subject to change at any time. Cryptocurrency exchanges may stop operating or permanently shut down due to fraud, technical glitches, hackers, malware, or bankruptcy.

Advanced Investing Concepts

• Short Selling: Borrowing shares to sell, hoping to buy them back at a lower price. It’s risky due to potential unlimited losses.
• Margin Loans: Borrowing from a brokerage to invest more, amplifying both gains and risks.
• Derivatives: Financial contracts whose value is based on underlying assets, used for hedging or speculation.
• Options: Contracts giving the right to buy (call) or sell (put) stocks at a set price within a specific timeframe.

Retirement Plans & Dividend Strategies

• 401(k): A retirement plan allowing employees to save with tax advantages, often with employer contributions.
• IRA (Individual Retirement Account): A tax-advantaged retirement savings account, with traditional and Roth options.
• SEP IRA & SIMPLE IRA: Retirement plans for self-employed individuals and small business owners.
• DRIP (Dividend Reinvestment Plan): Automatically reinvests dividends into more shares, compounding your returns over time. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Understanding these terms can empower you to make informed investment decisions as you begin your financial journey. Happy investing!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

No strategy assures success or protects against loss.

This material was prepared by Nathan Wyatt for the Investment Service Center’s use.

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