We’re going to look at how to invest money as well as some options where you could invest money, from setting your investment goals to finding the best investments for your individual circumstances and steps to get started.
The best way to invest money depends on your personal preferences along with your current and future financial circumstances. It's important to have a detailed understanding of your income and expenses, assets and liabilities, responsibilities, and goals when building a sound investing plan.
Remember, you don't need a lot of money to begin investing, and you can modify as your needs change. Here's a quick guide that can help you figure out how to invest your money right now:
How to Invest Money - Quick Guide
- Choose the best way to invest money - identify your financial goals, timeframe, and feelings about risk.
- Decide in what to invest money – choose a combination of investments that match your risk tolerance and provide diversification.
- Open an account - for general investing and trading, investing for a big goal, or simply giving your money the potential to grow, consider a CAPEX.com brokerage account.
Investing Money for Beginners
Investing money is the process of buying assets that may increase in value over time and provide returns in the form of income payments or capital gains. In the most straightforward sense, investing works when you buy an asset at a low price and sell it at a higher price. This kind of return on your investment is called capital gain.
Earning returns by selling assets for a profit—or realizing your capital gains—is one way to make money investing. When an investment gains in value between when you buy it and you sell it, it’s also known as appreciation.
- A share of stock can appreciate when a company creates a hot new product that boosts sales, increases the company’s revenues, and raises the stock’s value on the market.
- A corporate bond could appreciate when it pays 5% annual interest and the same company issues new bonds that only offer 4% interest, making yours more desirable.
- A commodity like gold might appreciate because the U.S. Dollar loses value, driving up demand for gold.
- A home or condo might appreciate because you renovated the property, or because the neighbourhood became more desirable for young families with kids.
In addition to potential profits from capital gains and appreciation, investing works when you buy and hold assets that generate income. Instead of realizing capital gains by selling an asset, the goal of income investing is to buy assets that generate cash flow over time and hold on to them without selling.
Many stocks pay dividends, for example. Instead of buying and selling stocks, dividend investors hold stocks or baskets of stocks (funds) and profit from the dividend income.
What’s the difference between saving and investing?
Let’s clarify what investing isn’t: investing isn’t stashing your cash in a savings account. Saving typically refers to putting money to one side, usually in a cash-based savings account. Here you will be paid a rate of interest and your money, or ‘capital’, will not be at risk. Over time, however, the purchasing power of money on deposit will be eroded by inflation.
When you invest money, you put your funds into a range of different assets, from property to shares. This differs from saving due to the uncertainty over the amount of money you will receive when you sell the asset. The value of the asset might rise, but you also risk making a loss if you must sell the asset for a lower price than you paid.
So why do people choose to invest money rather than save their money?
Potential for higher returns
Investors have the potential to earn higher returns on investments than savers with deposit accounts. The S&P 500 index acts as a benchmark of the performance of the U.S. stock market overall, dating back to the 1920s (in its current form, to the 1950s). The index has returned a historic annualized average return of around 11.88% since its inception through the end of 2021.Protect against inflation
Inflation is currently at around 10% in the US, UK, and EU the average interest rate on instant access savings accounts was below 1% (in June 2022), according to the Bank of England. If you invest money in a savings account paying 1%, and the inflation rate is 9%, the ‘real’ value of your money is effectively reduced by 8% every year. Investments have the potential to make higher returns to help counter inflation. Adjusted for inflation, the average return of the S&P 500 (including dividends) is 6.82%.Compound growth
Compound growth occurs when any income or interest is reinvested and grows along with the original money or ‘capital’. If you invested $10,000 for 10 years with an average annual return of 5%, it would be worth $15,000 if you withdrew the ‘gain’ each year, compared to nearly $16,300 if you reinvested it. As investments generally offer higher returns than cash, compound growth makes investments grow in value even faster. Dividends from an investment compound when they are reinvested into more shares of the stock or fund.
What’s the difference between speculation and investing money?
Whether buying security qualifies as investing or speculation depends on three factors:
- The amount of risk taken on: Investing money usually involves a lower amount of risk compared with speculation.
- The holding period of the investment: Investing money typically involves a longer holding period, measured quite frequently in years; speculation involves much shorter holding periods.
- Source of returns: Price appreciation may be a relatively less important part of returns from investing, while dividends or distributions may be a major part. In speculation, price appreciation is generally the main source of returns.
- Strategy: When investing money online you’re taking direct ownership of the assets you buy. Ownership entitles you to vote rights and dividend payments if the company grants them. Also, you need to commit to the full value of your position upfront. In speculation, a short-term investment that you can easily convert into cash, you’ll mostly use derivatives like CFDs to speculate on an asset’s price movements. You never take ownership of the underlying asset itself and you only put down a margin deposit to open your position. This is known as leverage. Because you’re speculating on price movements using derivatives, you can go ‘long’ and ‘short’.
As price volatility is a common measure of risk, it stands to reason that a staid blue chip is much less risky than a cryptocurrency. Thus, buying a dividend-paying blue chip with the expectation of holding it for several years would qualify as investing. On the other hand, a trader who trades cryptocurrency to flip it for a quick profit in a couple of days is clearly speculating.
What types of investments are available?
If you’re looking to invest money in financial assets, it’s important to spread your investment across different asset types. A balanced and diversified portfolio helps to protect against one investment underperforming and may also smooth out the different levels of volatility.
Let’s take a closer look at some of the options available to investors:
Investing money in stocks
Historically, investing money in stocks is one of the fastest, most efficient and most effective ways to grow wealth over the long haul. From the start of the Great Depression in 1930 through 2024, stocks averaged an annual return of around 6%, according to officialdata.org.
When buying shares in a company the investor becomes a fractional owner of that company. Owners of a company's stock are known as its shareholders and can participate in its growth and success through appreciation in the stock price and regular dividends paid out of the company's profits, although not all companies pay dividends. See here the best stocks to buy in November 2024.
How do you decide where to invest your money when there are thousands of stocks out there? This is the tough question; unfortunately, there isn't a perfect answer. A reasonable place to start is having 80% of the portfolio in a core index fund and using 20% to invest in individual stocks, according to famous investors like Warren Buffett.
Keep in mind it’s important to do your own research and know what you’re investing money in, whether it’s an index fund or individual stocks. Discover some of the best stocks to buy in 2024.
Investing money in bonds
Bonds are debt obligations of entities, such as governments, municipalities, and corporations. Buying a bond implies that you hold a share of an entity's debt and are entitled to receive periodic interest payments and the return of the bond's face value when it matures.
As fixed-income assets, bonds tend to be conservative investments that can help curb risk within an investment portfolio. Reducing risk is important to all investors sooner or later, but that’s especially the case for those who invest money for the first time as they could use the money preservation qualities that bonds bring to the table.
Bonds are sensitive to interest rates and historically have averaged less than stocks but with less volatility. Discover some of the most popular fixed-income products for 2024.
Investing money in funds
When investing money in stocks, the last thing a new investor should do is put all their eggs in one basket. That’s where funds can help, they are one of the most popular places where to invest money today.
Funds are pooled instruments managed by investment managers that enable investors to invest money in stocks, bonds, preferred shares, commodities, etc. Two of the most common types of funds are mutual funds and exchange-traded funds or ETFs.
Mutual funds do not trade on an exchange and are valued at the end of the trading day; ETFs trade on stock exchanges and, like stocks, are valued constantly throughout the trading day. Mutual funds and ETFs can either passively track indices, such as the S&P 500 or the Dow Jones Industrial Average or can be actively managed by fund managers. Discover some of the best ETFs to buy in November 2024.
Investing money in real estate
Trusts are another type of pooled investment. Real Estate Investment Trusts (REITs) are one of the most popular in this category. REITs invest in commercial or residential properties and pay regular distributions to their investors from the rental income received from these properties. REITs trade on stock exchanges and thus offer their investors the advantage of instant liquidity.
Investing in real estate can be effective for a beginning investor questioning in what to invest money. The barriers to entry are very low, and unlike speculating in the stock market that only makes money one way, with real estate, investors may lose value, but they don’t lose cash flow or equity build-up.
One caveat with investing money in real estate is it takes a lot of educational know-how, which requires time and guidance. Discover some of the best REITs to invest in for November 2024.
Investing money in commodities
Every starter portfolio should have a “hedge” asset that protects them and provides some much-needed portfolio versatility when market conditions decline. That’s where investing money in commodities, especially gold, can help balance out a new investment portfolio.
Commodities include metals like gold and silver, crude oil and natural gas, grain, and animal products, as well as financial instruments and currencies. They can either be traded through commodity futures—which are agreements to buy or sell a specific quantity of a commodity at a specified price on a particular future date—or through ETFs that invest in commodities (see Gold ETFs and Oil ETFs) or related companies.
Commodities like gold can act as a hedge against inflation or a declining dollar and is often a safe haven asset in times of geopolitical and financial market instability, although most of the time it is used for hedging risk or speculative purposes.
Investing money in high-yielding currencies
FOREX or currency market includes all aspects of buying, selling, and exchanging currencies at current or determined prices. Currency pairs can be traded for speculation or for interest. A carry trade in forex is a long-term investment strategy that involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return.
Popular foreign currency carry trades include trading high yielding currencies and Japanese yen because of their high interest rate spreads. An investor can borrow in JPY, effectively pay 0% interest, while buying British Pound or US Dollar, earning 5.25% and 5.50%, respectively, at prevailing rates, minus trading fees and applicable costs.
Carry trade can be a high-risk strategy. Therefore, it requires proper money and risk management to minimize the potential losses. Global macro funds and other hedge funds use carry trading and may combine it with positions that can also take advantage of the momentum in exchange rate environment.
Investing money in crypto
A cryptocurrency is a form of currency that exists solely in digital form. Cryptocurrency can be used to pay for purchases online without going through an intermediary, such as a bank, or it can be held as an investment.
Cryptocurrency investors can buy or sell them directly in a spot market, or they can invest indirectly in a futures market or by using investment products that provide cryptocurrency exposure. Discover some of the best cryptocurrencies to invest in for November 2024, as well as top 5 cryptocurrencies with potential to explode in 2024.
The most straightforward way to invest money in cryptocurrency is through the recently approved spot Bitcoin ETFs. This is a type of exchange-traded fund that directly holds Bitcoin as its underlying asset purchased through other holders or an authorized cryptocurrency exchange. This means that the performance of a Spot Bitcoin ETF is directly linked to the real-time value of the Bitcoins it holds.
Investing money through derivatives
Derivatives are financial instruments that derive their value from another instrument, such as a stock or index. Options contracts are a popular derivative that gives the buyer the right but not the obligation to buy or sell a security at a fixed price within a specific time period. Derivatives usually employ leverage - the ability to use a relatively small amount of investment capital to control a relatively large investment, making them a high-risk, high-reward proposition.
For example, commodity futures trading typically offers leverage in the neighbourhood of 20:1. In other words, to invest money in a standard 100-troy-ounce gold futures contract usually requires a margin deposit of only 5% of the total value of the contract.
In short, leverage offers you the ability to make a lot of money with just a little money. However, leverage applies to both positive and negative investment outcomes. Just as leveraged investments amplify profits, calculated as a percentage of required investment capital, they likewise amplify losses. Investing in leveraged investments requires careful money management. Unlike buying stocks or bonds, where the absolute maximum possible loss is no more than your total investment, with leveraged investments, it is possible to lose more than your total investment. Investors who are unfamiliar with trading leveraged investments often see their trading capital erode at an alarming rate.
Leveraged investments, used wisely, can be a vehicle for rapidly growing your investment capital. But to successfully take advantage of such investments, you must clearly understand the associated risks.
Our demo account is a great place for you to learn more about leveraged investing, and you’ll be able to get an intimate understanding of how CFD trading works – as well as what it’s like to trade with leverage – before investing money.
What to consider before investing money online
As you’re deciding what to invest in, you’ll want to consider several factors, including your risk tolerance, time horizon, knowledge of investing online, your financial situation, and how much you can invest.
If you’re looking to grow wealth, you can opt for lower-risk investments that pay a modest return, or you can take on more risk and aim for a higher return. There’s typically a trade-off in investing between risk and return. Or you can take a balanced approach, having safe money investments while still giving yourself the opportunity for long-term growth.
1. Risk tolerance
Risk tolerance means how much you can withstand when it comes to fluctuations in the value of your investments. Are you willing to take big risks to potentially get big returns? Or do you need a more conservative portfolio? Risk tolerance can be psychological as well as simply what your personal financial situation requires.
Conservative investors or those nearing retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments. These are also great for people saving for both short- and intermediate-term goals.
Those with stronger stomachs are likely to fare better with riskier portfolios if they diversify. A longer time horizon allows you to ride out the volatility of stocks and take advantage of their potentially higher return, for example.
2. Time horizon
An investment time horizon is the time period when one expects to hold an investment for a specific goal. The longer the time horizon, the more aggressive, or riskier, a portfolio an investor can build. The shorter the time horizon, the more conservative, or less risky, the portfolio the investor may want to adopt. Each type of investment carries different forms of risk, which should be factored into your investment strategy. Businesses can fail, borrowers can default, and even sound investments can be vulnerable in a market downturn.
It’s important that your investments are calibrated to your time horizon. You don’t want to put next month’s rent money in the stock market and hope it’s there when you need it, or money that you can not afford to lose.
3. Your investment knowledge
Your knowledge of investing money plays a key role in what you’re investing in. Some investments require more knowledge, you’ll have to develop your understanding of them. For example, if you want to invest money in individual stocks, you need a great deal of knowledge about the company, the industry, the products, the competitive landscape, the company’s finances, and much more. Many people don’t have the time to invest in this process.
However, there are ways to take advantage of the market even if you have less knowledge. One of the best places where to invest money in an index fund, which includes a collection of stocks. If any single stock performs poorly, it’s likely not going to affect the index much. In effect, you’re investing in the performance of dozens, if not hundreds, of stocks, which is more a wager on the market’s overall performance.
So, you’ll want to understand the limits of your knowledge as you think about investments.
4. Styles of Investing Money
Let's compare a couple of the most common methods of investing money:
Active versus passive investing
The goal of active investing is to "beat the index" by actively managing the investment portfolio. Passive investing, on the other hand, advocates a passive approach, such as buying an index fund, in tacit recognition of the fact that it is difficult to beat the market consistently. While there are pros and cons to both approaches few fund managers beat their benchmarks consistently enough to justify the higher costs of active management.
Growth versus value
Growth investors prefer to invest in high-growth companies, which typically have higher valuation ratios such as Price-Earnings (P/E) than value companies. Value investors look for companies that have significantly lower PEs and higher dividend yields than growth companies because they may be out of favor with investors, either temporarily or for a prolonged period.
5. How much you can invest
How much can you bring to an investment? The more money you can invest, the more likely it’s going to be worthwhile to investigate higher-risk, higher-return investments.
If you can bring more money, it can be worthwhile to make the time investment required to understand a specific stock or industry, because the potential rewards may exceed low-risk investments. Otherwise, it may not simply be worth your time. So, you may turn to ETFs or mutual funds that require less time investment. These products can also work well for those who want to add to the account incrementally.
6. The investment platform
Online investment platforms have grown in popularity with investors and are offered by brokers, banks, and other financial providers. You should always check that your provider is authorized and regulated by the appropriate regulatory body and that client money is covered by the Financial Services Compensation Scheme.
Here are a few tips when it comes to comparing investment platforms:
Check the fees
Many of the investment platforms charge an annual platform fee of around 0.25% to 0.45% of the value of your investments, although some, charge a flat fee. Most platforms also charge a share trading fee, although not all platforms charge a fee for fund dealing.
Look at the range of investment options
Some providers only offer their in-house funds, whereas others, such as Hargreaves Lansdown, offer a choice of over 3,000 third-party funds.
Other services
Some platforms provide extensive customer service helplines and online chat facilities, along with access to research and investing guides. Many platforms offer apps if you want to trade on your phone or tablet.
Find out if a chosen https://capex.com/registration platform is comfortable enough to work with it daily. All features and functions must be easy and understandable for you.
Principles of Investing Money Online
In analysing in what to invest money, investors tend to fall into one of two camps – those who make their decisions based on technical analysis and those who primarily utilize fundamental analysis. Above them, risk and money management are key to survival as an investor.
1. Fundamental Analysis
Fundamental analysis refers to analysis based on economic data or reports, such as the monthly Non-Farm Payroll (NFP) report in the United States, considered an important indicator of the overall health of the economy and, more specifically, of job growth.
Along with major economic indicators such as the Producer Price Index (PPI) and Gross Domestic Product (GDP), fundamental stock investors evaluate stocks based on the information contained in a company’s financial statements and earnings reports (often reported as “earnings per share,” or EPS). Investors also examine various financial ratios, such as the debt/equity ratio or price/earnings ratio, to evaluate a company and its stock price.
To jumpstart your investing, check out our free Academy lessons!
2. Technical Analysis
Many investors prefer to rely on technical analysis in making investment decisions. The technical analysis evaluates security not based on fundamental economic or company information, but rather on price and trading activity in the market. Technical analysis utilizes price chart patterns, technical indicators, and market activity (such as volume of trading) in order to predict a security’s probable future price movement.
Technical analysis is often favored by short-term investment strategies such as swing trading, day trading, or the highly speculative scalping technique. Long-term investors who buy and hold securities tend to rely more frequently on economic fundamentals, but over the short-term – trading within a single trading day – such fundamental factors may have less impact than technical factors on the price movement of a security.
Of course, some investors combine fundamental and technical analysis in making their trading decisions. An investor in gold futures might, for example, make a buy or sell decision based on economic fundamentals, but choose specific price entry and exit/target points based on technical analysis.
3. Risk and Money Management
The main reason risk and money management are so essential in online investing are this: Your losses hurt you more than your gains help you!
Money management is about ensuring that loss per trade is small relative to your total account size. Small losses of about one to three percent of your total account are survivable and possible to recoup, large ones are not easy to get back, and repeated large losses will destroy your account and confidence.
Risk management is about keeping losses small relative to your gains. Because even successful investors commonly experience a high percentage of losing trades, your goal is to keep losses from losing trades low relative to the gains from winning trades, so you can be profitable with fewer than 50 percent of your trades being profitable. That is what risk management involves.
How to start investing money online?
Online investing is filled with intricate strategies and approaches, yet some of the most successful investors have done little more than stick with the basics. That generally means using funds for the bulk of your portfolio — Warren Buffet has famously said a low-cost S&P 500 index fund is the best investment most Americans can make — and choosing individual stocks only if you believe in the company’s potential for long-term growth.
Carry trades, crypto funds, and commodities are for those seeking higher risk/reward potential. The availability of leverage magnifies gains and losses and creates an unmatched profit potential for those with limited trading capital IF (big IF here) they learn how to control the downside risk.
Here is how to invest money online with an international, highly regulated broker like CAPEX.com:
- Choose which type of account you want to use. If you’re looking for the right fit, browse all our account options. An online broker like CAPEX.com will allow you to self-manage your account, investing money in a variety of products, including stocks, bonds, funds and more complex instruments.
- Create an account. Regardless of your chosen account, you need to register and complete the KYC process to verify your identity.
- Fund your account with fiat money. Before deciding in what to invest money, you need to fund your account with U.S. dollars, Euros, or other accepted currencies.
- Select your investments. It’s up to you to choose where to invest money. how do you choose your investments.? Give some thought to your desired level of risk, your timeline, and how involved you’d like to be.
- Place your order. After deciding in what to invest money and the strategy, follow the steps required by the platform and app to submit and complete your order.
If you want to speculate on the stocks, indices, commodities, cryptocurrencies, and forex price movements (including falling prices) with low commission and leverage open a CFD trading account.
With CAPEX, you can invest in 5.000+ stocks & 50+ ETFs and trade CFDs on +2.000 stocks.
Final words about investing money
When you invest money, you are distributing resources into something to potentially generate income or gain profits. The type of investment you choose might likely depend on you what you seek to gain and how sensitive you are to risk. Assuming little risk generally yields lower returns and vice versa for assuming high risk.
There are different types of investment vehicles, such as stocks, bonds, funds, real estate, and more, each carrying different levels of risks and rewards. With CAPEX.com you can access 5,000+ stocks and funds listed on 10 major global exchanges, and 2,000+ derivatives products.
You can invest money without the help of an investment professional or enlist the services of a licensed and registered investment advisor. Technology has also afforded investors the option of receiving automated investment solutions (smart portfolios, roboadvisors, and more.
The amount of consideration, or money, needed to invest depends largely on the type of investment and your financial position, needs, and goals. However, many vehicles have lowered the minimum investment requirements.
Despite how you choose to invest or what you choose to invest in, research your products as well as your investment platform. Possibly one of the best nuggets of wisdom is from veteran and accomplished investor Warren Buffet, "Never invest money in a business you cannot understand."
More resources on investing
Before you start investing money you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to make more-informed investment decisions.
Our integrated third-party tools can help you decide in what to invest. Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.