Investing 101: understanding the basics of investing

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There are a lot of ways to save your hard-earned money and accomplish your financial goals. If you want your money to have the possibility of growing over time, you may want to consider investing your savings. Not familiar with investing? Don’t be intimidated, it’s not as complicated as it sounds. If you want to learn, grab a cup of coffee and keep reading. We’ll help you understand the basics of investing including investment concepts, strategies, and personal factors to consider when making investment decisions.

Investment options:

There are many vehicles to invest your money in and many strategies for how to choose which ones are right for you. The approach you take will depend on your personal situation, including factors such as your goals, risk tolerance (comfort with changes in the market) and time-horizon (length of time you plan to invest).

Basic investment vehicles:

Purchasing stocks or bonds are two common ways to invest. You can also purchase mutual funds, which pool your money with that of other investors and invest it in a diversified portfolio of stocks, bonds, or another vehicle, or some combination thereof. Stocks are generally considered more risky investments than bonds and because mutual funds are a combination of investments they offer more diversification.

Stocks

A stock represents a piece of ownership or equity in a company, so a person who owns stock (stockholder or shareholder) owns a piece of the company.
Stocks are considered the riskiest investment of the options listed here. Nevertheless, it’s worth noting even within this relatively risky investment class, some stocks are considered safer than others (though the potential for loss always exists).
As a company’s stock goes up in value, so does your piece of the pie, and vice versa when the value of a share goes down.
Some types of stock offer dividends, which is a regular payment made to shareholders. It’s important to note that there are many different types of stock, all with different characteristics. Before you invest, make sure you fully understand what type of stock you’re purchasing and all the risks associated with it.

Bonds

Purchasing a bond is essentially loaning your money to a corporation, city, organization or government for a fixed period of time and in return they’ll pay you some amount of interest.
The borrower issues a bond with the terms of the loan, including the amount and schedule of interest payments and the date on which the principal (the initial amount invested) must be paid back (the maturity date).
The value of a bond rises and falls with market interest rates, so it is possible to lose money when selling a bond.
Bonds are generally considered a less risky investment than stocks.
There are many different types of bonds, all of which work differently. Before you invest, make sure you fully understand what type of bond you’re purchasing and all the terms that come with it.

Mutual Funds

A mutual fund is a professionally managed collection of investments – generally stocks and/or bonds. This collection of investments is chosen by a fund manager. Investors can purchase one or many shares of a mutual fund.
Because the risk is spread out over many investments, mutual funds are generally considered less risky than an investment in a single stock.

Understanding interest

Much like bonds earn interest, you will find that some savings accounts offer the benefit of earning a small amount of interest on your money. Although it’s technically not invested, depositing money into a savings account is like lending money to a financial institution. A financial institution may pay you interest on the money you have deposited there, so that you can earn a small percentage on your savings over time. The amount of interest paid and how often it gets paid is primarily based on the type of account. Depending on the type of account and terms, interest may also compound over time. Compounding interest lets you earn interest not only on your original deposit, but also on any interest you earn on that deposit. It means your original deposit grows much, much faster than it would with simple interest!

Understanding risk

It’s important to remember that you are taking on risk with any investment, because you’re never guaranteed a positive return. While there’s always the potential to lose money (fingers crossed this isn’t the case), risk varies with investment type and if you are careful in spreading out your risk, you can minimize your chances of loss. A strategy many investors use to spread out their risk is called diversification. Diversification is an investment strategy where you choose many different investment types to balance out your exposure to risk – pairing investments that are risky with those that are not-as-risky, so you are more protected overall. Diversifying your portfolio is essentially making sure you don’t “put all your eggs in one basket.” Cliché, but true!

Building an investment portfolio

So, just how should you go about investing and putting an appropriate strategy in place? There are so many investment options and things to consider regarding your personal situation that a good place to start is with consulting professional. You can talk to a financial planner to understand the risk you are comfortable taking and get advice on how to invest to meet your specific goals, both short and long term. Don’t think you have enough money to work with a professional? Many financial planners offer simple, flat fees so there’s no minimum investment required to work with them. That’s true here at John Hancock! Our team of financial planners offer flexible packages to fit your needs and your budget. Everyone starts somewhere.

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