Flickr / Dima ViunnykAnyone with a little spare cash can invest.
Youre never too young to invest.
Yes, investing can seem intimidating, and yes, there are experts out there who seem to speak a whole different language, but not everyone needs to make a career out of it. Most of us are just in it to bulk up our savings for retirement, make a little extra money on the side, or even just beat inflation (more on that in a minute).
Below, find 25 investing basics that every 25-year-old should know. Is this everything there is to learn? Of course not. But its a solid start.About the concept
Your savings account isnt invested in anything ...You do earn interest on money in savings, but its usually less than 1%, and that money sits in the bank.
... but your retirement savings are.Retirement savings, on the other hand,areinvested if you put them in a retirement fund like an IRA or 401(k). This isnt the case if you simply name your savings account retirement.
Investments are one of the only ways to keep up with inflation.Inflation lops anaverage 3.87%off your moneys value every year, so you need your money to grow fast enough to outpace inflation. For most people, investing is the only way to get that kind of growth.
Investing is always a risk. Investing could earn you money or lose it. Just because many people invest
Flickr / Kate HiscockGo ahead and consider these eggs poorly diversified.About the jargon
A security is a financial instrument.Youll probably hear people refer to securities, which is a catch-all term for things likestocks, bonds, or CDs. Securities are divided into debt securities (money owed to us, like from a government bond), and equity securities (actual value we own, like stocks).
Stocks are equity in a company. When you buy a stock, youre buying a tiny little piece of an actual company. Not a lot, but ownership nonetheless.Stocks are more volatile than bonds, and may therefore yield greater rewards or losses.
The stock market lets you track stock performance.Stocks are traded on exchanges, which make up the overall market. The major stock exchanges in the US include the New York Stock Exchange (NYSE) and the Nasdaq. Stock prices are also tracked on indices such as the Samp;P 500 and the Dow Jones Industrial Average. While youll want to check in with your individual investments, monitoring stock market activity can give you an idea of how your portfolio might be performing.
Bonds are loans you make. When you purchase a bond, youre essentially loaning a little money to an entity --like the US government, for instance -- and that entity has to pay you back after a fixed period of time, with interest. There arent bond exchanges that show up in a ticker, because bonds are traded differently than stocks. However, there are sites where you can get an idea of bond pricing, like theWall Street Journal.
Diversification means spreading your money out among different kinds of investments. There are a lot of opinions out there about how diversified an investment portfolio needs to be, but most everyone agrees that putting all of your financial eggs in one basket is a recipe for disaster.
The ROI is how much money you make on your investments. To get an idea of how well your investments are performing, you can calculate the ROI by dividing an investments gains by its costs.
Spencer Platt / Getty ImagesThe New York Stock Exchange is a major fixture of Wall Street.About the process
Youll probably be charged fees.Investing isnt free. If youre working with an investment professional, youll pay them either a percentage of your portfolio or a flat fee (youll want to know if your advisor isfee-based or fee-onlybefore you sign on), online investment platforms or robo-advisors each have their own fee structures, and somemutual funds and ETFs also charge fees. These fees vary, and if you do your research, you can minimize them.
You dont have to pick stock by stock.Professionals collect groups of securities calledmutual funds, and you can invest in these funds to diversify your money without picking every individual stock or bond yourself.Index fundsare mutual funds chosen to reflect a specific stock index, such as the Samp;P 500.
You may have to pay taxes due to your investments ...The US government doesnt let you have the money you may make investing for free. When you cash in, youll owe whats calledcapital gains taxes.
... but you also may receive a tax break.Although different retirement accounts have different tax structures, contributions are often tax-deductible.529 savings plans, which are also investment accounts, are similarly tax-advantaged.
Sometimes, youll fail.Its an unfortunate truth that we wont all be rock star investors. For some people to do really well,others must do poorly. And sometimes, youre the other.
Flickr / Jamie McCaffreyInvesting isnt just gambling.About strategy
Starting early is a major advantage. In your 20s, your biggest asset is time. Even when youre just investing in retirement savings, nothing can make up for the effect of compound interest. Also, if you lose money in the market, youll have more time to make it back before you need it.
Hot stocks probably arent your ticket. Theres always a stock to buzz about, but that doesnt guarantee it will be your ticket to wealth. Its a better bet to research the company and make your own decision than to blindly jump on the stock of the moment.
Your long-term strategy has nothing to do with that mornings news.Most investors shouldnt buy or sell every time its recommended on TV. Theres an entire documentary explaining why active investing -- buying and selling stocks strategically and often -- doesnt work for most people.
Getting too attached to individual stocks can be dangerous. If you own a particular security youre attached to for sentimental reasons or because of its past performance, you might be reluctant to ditch it even if your advisor or investment professional says to. Securities areonly as good as how theyre performing currently, and you have to be willing to let low performers go.
You dont need to check constantly. If youve caught sight of a stock ticker (on Business Insider, for example), youre probably aware that markets go up and downevery day, and so do individual stocks. If youre investing for the long term and arent an investing professional, you dont need the anxiety of a running ticker on your desktop.
Dont invest money youll need soon. If youll need quick access to liquid cash in the short term, you wont want to park that money in the stock market. Some professionals say you shouldnt invest money youll need in the next five years, because if the market goes down, you wont have enough time to recoup those funds.
Wikimedia CommonsEven the most qualified professionals can be off the mark.About keeping a cool head
No one can reliably predict the market. They just cant. While professionals can make educated guesses, predicting the market is predicting the future, and no one can do it.
And past market behavior isnt a reliable way to predict the future. On that same note, looking at what the markets have done isnt a reliable way to predict what they will do. Again, this is a case of predicting the future, which could go in an unexpected direction due to unforeseen events known as black swans.
You dont know what you dont know. Theres a lot to learn about the stock market, and its a big mistake to think that youre an expert just because youre a generally smart, capable person. Theres always more to learn.
You dont have to do it yourself. You dont have to be an expert to invest. There arefinancial planners, wealth advisors, and even automated online investing platforms (robo-advisors) to guide you.
This post has been updated to clarify that the Dow Jones Industrial Average and Samp;P 500 are indices, not exchanges.