What Is Investing? 2024 Guide To Learn How It All Works

Investing is a critical part of your long-term financial plan since it can help you increase your net worth.

By investing, you don’t have to rely entirely on your day job to save for upcoming expenses and retirement. Instead, you can combine your salary and investment income to achieve your goals.

However, there are several components to investing, which can make the process a bit overwhelming. Luckily, we’ve shared everything you need to know to start investing and growing your wealth today.

How Does Investing Work?

What is investing? Perhaps more importantly, how does investing work?

When you invest, you buy shares of a company or purchase a physical asset with the goal of making money. Ideally, your investment returns will be higher than in an interest-bearing savings account where you keep your excess cash.

That said, it’s vital to remember that investing isn’t risk-free.

Investing in the stock market is the most popular strategy to earn passive income. The simple goal is to see your investment contributions increase in value through rising share prices and dividend income.

However, investments can take on many forms beyond buying stocks, bonds and funds through your 401k.

Some examples include:

Earning rental income from an investment property
Purchasing gold coins and jewelry
Owning a profitable business
Restoring and selling classic cars

Some investments are naturally income-producing assets, while others only make money when you can sell at a higher price than your investment expense.

What Are the Most Common Types of Investments?

You may consider starting with the most common asset classes to build your portfolio. These have many investment options and ongoing demand from buyers.

When it comes to the most common types of investments, stocks, bonds, mutual funds and more tend to be the most frequently chosen investment options.

As a result, you’re less likely to speculate on trendy investments like Beanie Babies, Pogs or modern-day sports cards.

While it’s possible to make money from the above investment ideas, they are less likely to be successful in the long-term than the following “evergreen” assets.

Bonds

You can make money with bonds by earning interest and selling them for a profit. Investors usually increase exposure to bonds as they age because this asset can provide a fixed income and are more low-risk than stocks.

However, young investors with decades to invest should consider stocks and other assets with high long-term growth possibilities in order to have potentially higher gains.

There are several different bond options, including:

Corporate bonds: Tend to have higher yields but can be riskier
Government bonds: Usually have higher yields than short-term bonds
Inflation-linked bonds: Yields are based on the current inflation rate
Small business bonds: Earn a yield that’s higher than most other bonds

An example of a small business bond is Worthy Bonds, which pays 5.5% annual interest to investors.

Learn More: Worthy Bonds Review: Can You Really Earn 5.5% Interest?

Commodities

Natural resources are a staple of daily life, and you can invest in the commodities that you use regularly.

Commodities you can invest in include:

Energy (i.e., coal, natural gas, oil, uranium)
Food (i.e., coffee, sugar, rice, wheat and wine)
Industrial metals (i.e., aluminum, copper, nickel, steel)
Precious metals (i.e., gold and silver)

Commodity investing can be risky as it’s cyclical. Asset values usually increase during periods of peak demand or when investors want alternative investments instead of stocks and bonds.

Unfortunately, commodity prices and their futures trading contracts can decline rapidly in price when demand cools or there is a recession.

Additionally, most commodity investments don’t earn dividends and solely rely on price appreciation to profit.

In many instances, the easiest way to get exposure to this sector is by holding commodity funds that reflect the current price of futures.

Another option is owning a physical asset like coins or jewelry. While you own a tangible item, the investment costs can be higher. Plus, you must store the product until you sell it.

If you’re unsure how to incorporate commodities into your investment strategy, the All-Weather Portfolio is an excellent starting point.

Mutual Funds and Exchange Traded Funds (ETFs)

Mutual funds and ETFs can be better than buying individual stocks or bonds as it’s easier to diversify your portfolio since the fund invests in multiple companies.

Depending on which mutual funds or ETFs you choose, the minimum investment can be more affordable than the price of a single stock because you may only need to invest $1.

It can also be easier to buy mutual funds or ETFs instead of stocks in your workplace retirement plan.

There are two different fund investment strategies:

Active funds: Hold companies that may outperform the benchmark
Index funds: Passive strategy tracking a benchmark index

Choosing the proper asset allocation depends on your investment goals. You may select a target-date retirement mutual fund that becomes more conservative as you finish your investing career.

Another option is the 3-Fund Portfolio, which can produce similar results but with lower expenses as you periodically rebalance.

Real Estate

Crowdfunded real estate is one of the most affordable ways to get exposure to this historically expensive asset class. By being a fractional investor, you also don’t have to screen tenants, collect rent or maintain the property.

Depending on the platform, you can invest as little as $10. Here are some of the real estate investing services to consider, listed in alphabetical order.

Fundrise

You can invest as little as $10 with Fundrise and earn quarterly dividends from commercial as well as multifamily properties. You will need to hold your investment for at least five years to avoid early redemption penalties.

This platform is open to both accredited and non-accredited investors.

Learn More: Fundrise Review: Invest in Real Estate with Only $10

Groundfloor

Groundfloor is a short-term investment option with a $10 minimum investment and holding periods from four to 12 months. You fund home renovations as the borrower improves the property and tries to “flip” it for a profit.

Investors earn monthly loan interest but not rental income. They introduced a new Groundfloor mobile app available via the Apple App Store and Google Play Store for easier access.

Learn More: Groundfloor Review: Is Groundfloor Legit?

Yieldstreet

Yieldstreet allows accredited investors to invest in individual projects like real estate, art and business notes.

Non-accredited investors can also get exposure to these alternative investments through the Yieldstreet Prism Fund. This multi-class asset fund has a $2,500 minimum investment.

Learn More: Yieldstreet Review: Pros, Cons and How it Works

Stocks

Investing in stocks primarily makes money from shares increasing in value over time. Many stocks also pay quarterly or yearly dividends that can boost your portfolio value.

Stock investing can be more high-risk, so you may want to focus on large-cap companies first. These tend to be less volatile and can have healthier balance sheets.

How to Manage Risk When Investing

Investing isn’t risk-free, especially when compared to options like a savings account, but you can adopt various strategies to prevent investment losses.

These include:

Avoid high-risk assets that are too volatile for your risk tolerance
Rebalance your portfolio regularly
Use stop losses to exit a position if the share price drops too much
Sell some of your successful investments to take profits

Your risk tolerance will help determine which investments you pursue.

How Diversification Minimizes Risk

A diversified portfolio is one of the most effective risk management strategies to minimize your risk of losing money.

For example, you may hold index funds that invest in thousands of companies instead of only a handful of individual stocks.

As your portfolio grows, you can consider adding alternative assets, including art, commodities or real estate. The investment performance for each asset class can be different from stocks.

A periodic portfolio analysis can also determine if you should add or reduce a position, making your investments more low-risk in the process.

How to Start Investing

There are many investing apps that you can use to start investing. Some offer automated portfolios, while others give you complete control to build your own investment pie.

If You Just Have a Little Bit of Money

It’s possible to begin your passive income journey and invest $100 or less. To maintain a diversified portfolio, you could consider starting with broad market index funds.

Some platforms also let you invest in tangible assets by having fractional ownership of real estate and collectibles. The investment fees are reasonable, even if you micro-invest.

If You Want a Hands-On Approach

When you’re comfortable managing your portfolio, you should consider an online brokerage with no trading fees and extensive research tools.

Some of our favorite platforms for buying stocks include:

Ally Invest: Trade stocks and ETFs by purchasing whole shares and accessing several research tools. Ally also offers robo portfolios with no advisory fees.
Charles Schwab: You can buy stock slices as small as $5 for S&P 500 members. There are no trading fees for stocks and funds, plus it has research tools.
TD Ameritrade: This online brokerage has in-depth research tools for beginner investors and experienced traders. Fractional investing isn’t available.

Each of these platforms have a $0 commission to buy or sell stocks and ETFs.

If You Want a Hands-Off Approach

The following platforms can recommend a personalized asset allocation of stock and bond index funds.

Each service will automatically rebalance as you invest new funds, and many robo-advisors also offer banking services to deposit paychecks or pay bills.

Here are our top picks if you want to take a hands-off approach to investing:

Acorns: Invest as little as $5 at a time. You can round up purchases or shop at participating retailers to fund your investments. Has a $3 or $5 monthly fee.
Betterment: Create a stock-bond or socially responsible portfolio with as little as $10. The annual advisory fee is 0.25%.
Empower: Investors can use the free portfolio analyzer and retirement planning tools. Managed investment accounts require a minimum $100,000 balance.

Advisory fees apply to each option above, but they are affordable and can provide the assistance you need to begin.

Why You Should Invest Early and Regularly

“Early and often” can be the best investment frequency so that you have a longer period of time to make money.

Investing small amounts of money won’t make you rich overnight, but consistent contributions can turn into a small fortune over a lifetime.

Putting money into investments regularly also prevents you from timing the market and waiting to invest a lump sum until you can finally afford an expensive investment or a bull market begins again.

Dollar-cost averaging means you invest the same amount of money each month and buy assets at the current price. As long as asset values increase before you need to sell, you can be a successful investor.

Having more time in the market can be more productive than timing the market since it puts your money to work immediately.

Summary

Whether you invest in stocks, bonds or another option, investing can help increase your net worth since it allows your long-term cash reserves to be more productive.

There isn’t a one-size-fits-all solution when it comes to investing, but you should start with the asset that fits your risk tolerance and budget.

In time, you can expand into other assets to diversify your income streams.