If you are interested in getting into investing, but you do not know where to begin, this may help guide you in taking your first steps in growing your money. The first step is knowing what the different kinds of investments you can make are. Many terms on this list you have surely heard before, but may not know exactly what they mean. Understanding the basics builds a nice foundation to begin your investing career.
Mutual funds are a type of investment that is managed by pooling together your money with others who are also interested in investing. Mutual funds typically have a manager that used the pooled money and goes out and buys securities for the group. For the newcomer, mutual funds are a safer route (and cheaper) than buying individual stocks on your own.
Since mutual funds are diversified, there is less risk than having all your eggs in one basket. You can also save money by enlisting the assistance of a mutual fund company to help direct your funds.
Buying individual stocks is almost like an art form. Have to know when you strike and buy a stock and when to dump dead end ones. The best rule of thumb when taking this approach for your first time is to never allocate more than 10-percent of your portfolio to a single, individual stock. It is always best to diversify as much as possible.
Perhaps the most popular among the retirement accounts, Roth IRAs are accounts that have contributions that can potentially grow tax-free before you reach retirement age. Roth IRAs allow a person to set aside after-tax funds for this account and when they are ready to retire, they can make withdrawals that are tax-free. Just remember that you cannot deduct your contributions on your income taxes.
Unlike its Roth IRA counterpart, Traditional IRAs’ contribution have the potential to qualify as a tax deduction on your tax return. Also, conversely, with Traditional IRAs your contributions are taxed whenever you are ready to make a withdrawal. The potential advantage to this is setup is that whenever you reach retirement age is that you will be at a lower tax bracket and that would make the tax hit smaller than it would while you at peak earning.
As you might have inferred from the name, this retirement option creates an account by rolling over another existing account, like a 401k from your work. So if you were to change employers, you can take the money you were investing in the 401k and roll it over to a Rollover IRA. Rollover IRAs are taxed like Traditional IRAs, so you will see the tax when you are ready to make a withdrawal at retirement age.
When you are investing for the first time, it is best to take it slow and steady until you get your sea legs and become a more seasoned investor. While investing is a great way to grow your money, it doesn’t mean it doesn’t come with risks. Be sure you know what you are getting yourself into before taking the plunge.