With technical terms and potential to lose money, investing can feel scary. The number of questions people have about investing goes on and on—and on. The stock market is a great place to make extra income without working overtime, but it does come with risks.

Benefits and Purpose of Investing

Why invest at all? The idea of investing is to save and build money for the future. Often, investing can lead to greater gains than a regular savings account but, of course, growth isn’t guaranteed. This is where risk comes into play. There’s a chance that your money will grow, but there’s also a chance you could lose the money you invest. The levels of risk will vary depending on the investment type.

Investing is one of the most effective ways to save enough money for retirement. Retirement funds, like traditional and Roth 401(k)s and IRA plans, are investment accounts that make money through the stock market. These funds create a reliable and safe pathway to retirement. It’s wise to contribute as much as you can to a 401(k) or IRA—ideally the maximum amount— before delving into other types of investing.

What Is The Stock Market?

When people think of investing, they often think of stocks. The stock market is a place where shares are bought, sold, and traded. A stock is a part of ownership in a company. A share is a piece of a stock, though people often use both terms interchangeably.

As the value of the company goes up, the value of the stock or share also goes up. The basic idea of making money on the stock market is to buy a stock now and sell it later when it’s worth more than what you paid. Of course, that doesn’t always happen. Sometimes the value goes down and you end up selling it for less and lose money.

Capitalize on Growth

When you sell a stock for more than you paid for it, that earning is referred to as a capital gain. A short-term capital gain comes from stocks you own for less than a year before selling, while long-term capital gain is from stocks you own for longer. The government taxes gains depending on whether they are long or short, with short-term gains taxed as regular income. A capital loss happens when you sell an asset for less than you paid. Capital losses can offset capital gains at tax time, lowering an investor’s tax bill.

Investment Mindsets

There are different approaches to investing, most based on the level of risk an investor is willing to take. Some people prefer to invest in zero- or low-risk investments like Certificates of Deposit or Share Certificates. These investment options are safe, but likely have lower returns than riskier investments. The opposite is also true. Risky investments are less safe, but can have higher returns.

One way to approach investing is to think of growth vs. income. Some investments pay interest, like bonds, or dividends, as is the case with some stocks. Dividends are payments a company makes to investors, often when the company has significant sales or performance. Dividends can give you an idea of how much you’ll make going into an investment and can provide a steady stream of income. These investments also tend to be lower risk. For other investments, the only way that you’ll gain money is if the investment grows in value. These investments can earn more than an income-focused investment (aka one that earns dividends), but they also come with more risk. When deciding how to approach investing, an investor has to decide what level of risk they want to take.

Investing in the stock market can be a good way to make the most of your extra cash, but it isn’t guaranteed. Investing always carries risk, and the best way to minimize risk is to put your money into stable investments over a long period of time. You won’t double your money in a day, but over time, even a small yearly return can add up to a lot of extra money.

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Posted In: Investment