If you’ve ever wanted to improve your financial life then you probably learned the importance of reducing your expenses, saving money first, and then investing what you saved in assets or things that generate more money. There are lots of investments out there such as stocks, bonds, mutual funds, ETFs, money markets, real estate, gold, silver, FOREX, options, antiques, trading cards, and more so which ones should you choose?
Well if you’re just starting out then these are the main kinds of investments you should look out for.
Investing Money for Beginners: Five Common Investment Vehicles to Check Out
There’s a common belief that investing is like gambling. You “bet” on the right stock at the right moment and if you win, you win big. If you bet wrong, you lose money. If you keep “playing” the stock market, you’ll lose.
Well, they’re right. If you play the stock market like a casino, you’ll most likely lose. If, on the other hand, you study the companies and make educated decisions, then you’ll most likely do well.
Risk comes from not knowing what you’re doing.
— Warren Buffett
So what are stocks anyway? To put it simply, they are shares of ownership of companies.
Here’s an overly simplified way to explain it. Imagine a nearby convenience store issues 100 shares of stock. If you bought all 100 shares, you “own” 100% of the store. If you bought just 50 shares, then you own half of it. That’s basically how it works. As a stockholder, you’re a partial “owner” of the business. You don’t directly run the business though as you’ll leave it to the board of directors (CEO, CFO, managers, outside directors, etc.).
In any case, most companies in the stock market have thousands and thousands of shares (called “outstanding shares”) and you only need a decent amount in order to do well.
If the company whose shares you bought does well, the stock price will generally increase in value and the dividend payments may increase as well. Just beware of investing in bad companies or investing during bad times (bubbles, stock overpriced, etc.) as the value of your investment might decrease.
You can profit from stocks in three ways:
- Dividends: When the company gives a part of its earnings to the shareholders (“owners”).
- Long trade: This is the usual method of earning from stocks. You buy the stocks of good companies now and as they do well, you sell the shares at higher prices later. “Buy low, sell high.”
- Short trade: This is, in a way, the opposite of the long trade. If you think a stock will decrease in value, you borrow from the broker and sell shares now and then close the trade by buying back the same amount of shares later. “Sell high now, buy low later.”
If you want to learn more, read our other articles about stocks here:
- What are Stocks and Why should you Invest in them?
- How to Invest in Stocks: 10 Things Beginners NEED to Know
- Choosing the Best Stocks: 10 Investing Terms you HAVE to Learn
In the Philippines, we refer to moneylenders as “five-six.” If you need to borrow money for some reason, you can approach them for some but you need to pay them back with interest (borrow 5 pesos, pay them back 6). That is, in a way, similar to investing in bonds. Companies and government organizations often need to borrow money and they sometimes do it by issuing bonds which you can invest in. When it matures, they pay you back the money and you earn from the added interest. Unlike “five-six”, however, the terms are generally very low.
Bonds in general have lower risk or volatility compared to stocks, but you won’t earn much from them either. Financial professionals do recommend investing in them especially when you grow older and need a little more stability in your investment portfolio (your collection of investments).
Mutual Funds and ETFs
When lots of people pool their money together to invest in assets, that’s basically a mutual fund. An exchange-traded fund (ETF) is similar, with the main difference being that it trades like a stock. Most funds invest in stocks, bonds, money markets, or a combination of the above.
Unlike investing in individual stocks and bonds (or other assets) where you are the one responsible for choosing where you want to invest your money, mutual funds and ETFs are managed by professionals known as money managers or fund managers. They are the ones who do the research and invest your money for you.
If you know how to select a good fund then this is one of the better investment vehicles for beginners. Here, you let professionals and institutions invest and reinvest your money for you.
Read more about mutual funds here:
- What are Mutual Funds? (A Short Guide for Beginners)
- The First Metro Index on MSCI Philippines IMI Launch (Read this one for an intro on index funds and passive investing.)
This, like savings accounts, is commonly offered by banks. Unlike normal savings accounts where you earn far less than one percent a year, a time deposit can give you better rates depending on the maturity date or how long you keep the money in the bank.
Unfortunately, even the best time deposits can give only around 1%. That’s far below the inflation rate and your money actually loses value more than it earns. Thanks to that, even though time deposits are very safe, they can barely be considered an “investment.”
Investing in real estate is basically buying land. If you own a piece of real estate, you own and are allowed to use the land, the buildings or structures on it, and its natural resources.
Whether a piece of real estate is a good investment or not, that will depend on its location. For example, a piece of land located near a shopping mall or a business center is worth a lot more than a piece of land located deep in the jungle or in a slum with high crime rates.
There are many ways to profit from real estate, such as by selling the land when its value increases, build rental property on it (residential or commercial), or more. Buying good land tends to be expensive though, and even if real estate prices often increase over time, there are exceptions like when you bought it during a real estate bubble.
While we’ll only cover the five most common, here are a few other investment vehicles that you might want to check out:
- Gold, silver, and platinum (precious metals)
- Money markets
- Currencies (Forex, bitcoin, etc.)
- Collectibles (Antiques, trading cards, figurines, etc.)
- Commodities (Oil, grains, natural gas, etc.)
Learn more to EARN more!
When driving, you reduce your chances of getting into an accident by learning how to drive. Similarly, you reduce the risks of losing your money from your investments when you learned how to invest properly.
Always, and I mean ALWAYS, do your homework. Warren Buffett once said that risk comes from not knowing what you’re doing. If you don’t know what you’re investing in, there’s a very high possibility that you’ll lose your money on bad investments like overhyped stocks and funds (read about my friend’s bad mutual fund story here) and scams like that recent EmGoldex scheme.
Learning how to invest may seem difficult especially when you’re just starting out, but it gets easier as you read more about how banks, funds, and businesses work. Do you remember how you learned to read and write? You probably didn’t know all the words you know at first, but as you kept practicing, it all got easier. Investing is very similar. Just study it one lesson at a time and you’ll get good at it soon enough.
By the way, you might want to check out this list by GritPH: 10 BEST INVESTMENTS FOR YOUNG PROFESSIONALS & ENTREPRENEURS IN THE PHILIPPINES