To Invest, or Not to Invest?

Should you invest? What is investing? Why should you think about investing?

Investing is simply proactive saving with a varying amount of risk. You can invest through many media, such as stocks, bonds, CDs, ETFs, mutual funds, money, cars, real estate... the list goes on and on! Your investing goals and needs will determine how you should invest.

Before you invest in anything, you should have the following:

1. Liquid assets - a savings account with a large sum of money; this amount will be an emergency fund. If you have a car, you should have enough to replace your engine or transmission. If you have a pet, you should have enough to cover an overnight vet stay. Use this as a guide for your savings amount. If you don't have any assets/liabilities, just have $1,000+ stashed away.
2. A checking account - you need a bank account that can easily transfer funds into or out of your investment account
3. Income - your income should be at least 5% greater than your expenses. This makes sure that a small expense (such as an oil change or doctor visit) doesn't dip into your emergency savings account. If you don't know your income/expenses, calculate it using this link.
4. Credit - before investing,start building credit. If you haven't already done this, click this link.
5. Investment Account - you need an account that will allow you to invest. Try to get a low-fee account (<$10 per trade). Your fees should always be equal to or less than 2% of your principal investment. 

*WARNING* I take no responsibility for any money you may make or lose while investing. Do not invest unless you meet the criteria above AND you aren't willing to lose the money you invest. I recommend also reading in depth about investments at www.investopedia.com before making an investment choice.

At this point, you should have all five steps completed. Before we start, I want you to know that if you have less than $1,000 to invest, I would recommend to keep saving and not invest yet. You need at least $1,000 for it to be worth your time.

Quick terms:

• Principal - the initial amount you invest
• Asset - investment possession (ex. a stock, house, etc.)
• APY - annual percentage yield (compounding interest rate)
• APR - annual percentage rate (non-compounding interest rate)
• Realized Gains - money made after selling an investment
• Realized Losses - money lost after selling an investment
• Unrealized Gains/Losses - change in value of investment, but it's not realized because you haven't sold your investment
• Volatility - amount of risk of investment; usually a sign of a large change in value in a short amount of time
• Trade - act of either buying or selling either the whole or pat of your investment
• Liquidate - selling an asset to become money/funds

Stocks

When you buy a stock in a company, you are buying a small portion of that company. You have a claim on that company and its assets. For some stocks. you can vote on the management of the company and do other fun little things. However, most investors don't do this. You usually can't do this unless you own a significant portion of the company (we're talking hundreds of millions of dollars and more). Stock price changes every few seconds throughout the day from 8:30 a.m. to 4:30 p.m. EST, Monday through Friday (excluding federal holidays). 

Stocks are one of the most volatile (riskiest) but most rewarding methods of investing. If you buy a stock and it rises 4% that day, you've already increased your investment by 4%. If you invested $1,000, you've made $40. However, if it falls 6% the next day, your investment is only worth $977.60. 

Stocks are easily liquidated. You just sell the stock, and it's liquid money for you to use at your disposal. Easy as that. However, if no one is buying your stock at that time, then your stock will not sell. This usually won't be an issue, but know that this can happen.

Stocks are great if you know a company will excel in the near future. The only problem is that no one can ever know how well a company will do in the future. Good luck with that. 

Stocks are fun, though. You can trade them as often as you want, and they typically have somewhat low fees. However, be careful not to trade too often when you have a low principal. If your trade fee is $8.95 per trade and you have $1,000 to invest, you will eat up 2% of your principal by just buying and selling your investment. 

Stocks and ETFs are usually for those who have less than $5,000 to invest. For most college students, that means you. Every other investment is typically not open to you or not worth it in the long run. You are shooting for a 10% increase in value per year. If you can do better, good for you. If you can't, keep trying! It takes practice and a lot of research to determine what stocks to buy and when to buy them.

Bonds/CDs

A bond or CD is a loan from you to an institution. When you give the institution the money, it typically reinvests it and makes more money than you typically can. After the bond/CD term is over, the institution gives you the previously-agreed-on interest back plus interest. 

This is one of the safest kind of investments. It typically lasts from one year to ten years, with longer terms resulting in higher interest rates. Due to the low risk, you will usually yield less than 5% interest. I usually don't recommend this method to college students because it's not easy to liquidate. If you liquidate a CD or bond before your term is over, you will usually incur a fee. If you want to put away money for a long period of time (we're looking at you, retirement), then you should just invest in an IRA. More on retirement investment accounts in a later article, though. 

The only reason for you to invest in bonds or CDs is if you know you won't need the money for X amount of time, but you can't afford to lose it. Your extras that you don't put into an emergency savings account can be used for this. However, make sure that you can't get a better APY with a high-interest savings account. Again, more on bank accounts in a later article. 

Mutual Funds/ETFs

These are best investment strategies for long-term investing for non-retirement savings. A mutual fund is a collection of stocks and bonds professionally managed by some big cheese guy. An ETF is a collection of stocks. ETF stands for exchange-traded funds.

There are many types of mutual funds and ETFs. All come with varying amounts of risk. Today, we will only discuss "index" funds. An index fund tracks the stock market as a whole through the S&P 500 or other indexes. It increases in value as the stock market increases, and it decreases as the stock market decreases. INVEST IN THESE. The stock market has proven to increase every year (except during the latest recession of '08 and '09). You will make a decent amount of money if you leave your investment alone and forget about it for about thirty years or longer. You will make a lot more if you invest more money into it every year.

Get a fund with a low expense ratio. The expense ratio is the percentage that the fund owner takes out and keeps for him or herself each year. Index funds typically have extremely low expense ratios.

Mutual funds are not very easily liquidated. However, ETFs are. I recommend ETFs for general investing purposes.

Tangible Assets

This is where investing becomes really fun for some people. You can buy a Rolex for $2,000. In ten years, that same Rolex could be worth $4,000.

You can buy a used car for $5,000. You can then find someone that's willing to pay $6,000 for it and sell it to them for that much. You've made $1,000.

You can buy and sell things on eBay. Even though this may not be considered investing, you are still taking a risk and possibly turning a profit--the definition of an investment. . 


Investing is good for your wallet and your life--if you do it wisely. If you don't think you want to invest because of the risk, then don't! Just get a high-interest savings account and start saving up. If you enjoyed this post, please share it with others. If you have any other questions, please post them in the comment section below!