A Guide to Investing for College Students
Investing for beginners is easier than ever before. With access to the stock market as close as your keyboard, you're just clicks away from getting started. Just learn the basics and find the right online tools to help you, and you'll be on your way.
The first concept to get to know in beginner investing is compound interest. The same principles of interest that can keep you in debt when you're trying to manage your credit work to your advantage when you invest money. Simply put, it means that the interest you make on an investment is added to your original investment and then reinvested to make even more interest. It's not as complicated as it sounds.
It is never too early to begin investing, with time on you side even a little investment can go a long way
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Here's a simplified example. An original investment of $100 with a return rate of 10% that's compounded yearly would make $10 in interest in year one for a total balance of $110. In year two if that $110 achieves the same 10% yield, it would add an additional $11 to the total. Continue to let the money compound over the next 18 years at 10% annually and by the 20th year it would be $672.75. But let it continue to compound for 30 or 40 years and it would grow to $1,744.94 and $4,525.93 respectively. All that without adding any additional money. Wow!
If you've determined that investing is right for you, you should look for an online discount stock brokerage or other financial services company that allows you to open an account with a low minimum balance, or none at all. The company you choose should offer low maintenance and trade fees, while providing you with tracking and investment management tools so that you can easily keep an eye on your investments. But before you sign up, you should know some basic investment terms and products.
There are many other definitions and concepts that you should have a working knowledge of as a beginner investing for the first time. These include:
- 401K - A company-sponsored retirement plan that allows you to contribute pre-tax dollars. 401Ks shelter your interest earnings as you continue to work, so that you'll only be taxed when you retire and withdraw money. 401Ks help to reduce your taxable income each year, saving you money on federal, state and local income taxes
- Bond - When corporations and governments borrow money from investors they are given a bond. The borrower in this case agrees to pay the investor the price of the original 'loan' plus interest at a predetermined later date
- Capital gain/capital loss - The money made or lost from an investment
- Certificate of Deposit (CD) - Typically a bank-issued document that guarantees an investor a specific yield on an amount of money when 'lent' to the bank for a pre-determined period of time. CD terms range from a month to several years
- Diversification - Making investments in different types of funds to help distribute your risk. Some funds are diversified in themselves, and could for instance include stocks from biotech, telecommunications, banking, entertainment and food manufacturing companies
- Individual Retirement Account/IRA - A retirement account that provides tax-deferral or other tax benefits
- Interest - The amount paid by a borrowing party for use of a lender's money. With credit cards you are the borrower, with investments you are the lender
- Mutual fund - A financial product that is managed and marketed by an investment company and can be comprised of stocks, bonds, or other securities products. The investment company pools investor contributions to buy and sell stocks and bonds for the entire group
- SEC/Securities and Exchange Commission - The governmental regulation agency that was established to help protect investors and oversees participants and activities in the world of securities
- Securities - Any type of investment product like a stock, bond, note, etc.
- Stock - A certificate or share of ownership in a corporation
- Trader - One who buys and sells securities like bonds, stocks, etc.
- Yield - The return on an investment as a percentage
If you grasp these investing for beginners basics, you can be investing in no time. Sure growing your investments may take time, but the returns will be well worth the wait.