Investing Basics: A Beginner’s Guide to Growing Your Wealth

What is Investing?

When it comes to learning the foundations of investing or the investing basics it’s essential to understand what investing actually means. By definition, investing money refers to putting money into something – such as real estate, stocks, or index funds – with the goal of increasing its value over time.

Investing money is one of the most effective ways build wealth. The wealthiest people throughout the world utilize their assets to earn a profit or generate an income – this is how they get wealthy! While there are countless ways to invest, this guide will cover the most popular investment options and explain their core functions.

How Do You Make Money From Investing?

If you are looking to start investing, you need to understand the investing basics of how to turn a profit. There are four main ways investors make money:

1. Dividends:

Dividends are payments made by companies to their shareholders, typically on a quarterly basis – 4 times a year. If you own shares, this means you get to participate in the company’s profits through dividends. Dividends are commonly paid out through cash, however they may also be paid as additional shares of the company.

2. Interest:

Interest earnings come from investments such as bonds, high-yield savings accounts, and certificates of deposit (CDs). There are two types of interest:

Simple Interest:

Simple interest calculated based on the original investment amount.

The formula to calculate simple interest is:

A = P(1 + rt)

• A = interest or the total amount
• P = initial principal balance
• r = annual interest rate
• t = time

Let’s do an example:

John invests $10,000 into a CD with a 5% interest rate that matures in 3 years. He wants to find how much money he would have at the maturity of the CD.

1. First take the interest rate of 5% multiplied by 3 years. Remember, when calculating an interest rate in a mathematical formula, it’s best to convert it to a decimal.
   • .05*3 = .15
2. Then add 1 to the answer.
   • 1 + .15 = 1.15
3. Finally, we take the sum and multiply it by the initial principal balance, or the original investment.
   • 1.15 * 10,000 = 11,500

John will have a total of $11,500 in the account by the CD’s maturity. Meaning he will profit $1,500 at the end of the 3rd year.

2. Compound Interest:

Compound interest earns interest on both the original amount and any accumulated interest. This is an extremely powerful tool in the world of investing money.

The formula to calculate compound interest is:

A = P (1+r)^n

• n = number of times interest is applied per period

Using the previous example:

John invests $10,000 into an account with a 5% interest rate for 3 years, and interest is compounded daily.

1. First we will take the interest rate plus one
   • 1 + .05 = 1.05
2. Now take that to the third power, since we are investing it for 3 years
   • 1.05 ^3 = 1.157625
3. Finally, take this number times the principal balance of $10,000
   • 1.157625 * 10,000 = 11, 576.25.

John will have a total of $11,576.25 in the account by the end of the 3rd year. As you can see, compound interest is a far superior method and much more ideal for the investor.

3. Capital Gains:

Capital gains occur when investors sell their securities or assets, such as stocks, mutual funds, or real estate for more than they originally paid. For example, if you bought a stock for $100 and sell it for $150, you have a capital gain of $50. It is important to keep in mind that capital gains are taxable. This is a key concept in investing basics.

4. Rental Income:

If you have ever rented a house or apartment, you have participated in the process of rental income! Real estate investors earn money through rental income when they lease their properties to tenants. When someone owns a piece of real estate and rents it out for greater than the monthly expenses, they have a profitable rental income.

Investing Basics: What Can You Invest In?

Now that we’ve covered how investments generate income and other investing basics, let’s explore the most common investment options.

Stocks:

Stocks are a representation of ownership, or a share, in a public company which are purchased through a stock exchange. They can be a high-risk investment but also offer high rewards. You profit through capital gains and dividends when investing in stocks.

Bonds:

An easy way to look at bonds it to think of a loan. Bonds are an IOU that is issued by a corporation or governments. When you buy a bond, you are loaning the bond issuer money. Bonds are typically less risky than stocks, but offer lower returns.

Bonds have three main components – coupon, maturity date, and par value. The coupon is the rate that the bond issuer pays to the bond holder – essentially the interest rate on the bond. The maturity date is when the payment is due to the bondholder. The par value is the total amount that is to be paid to the bondholder at maturity. The par value is the original principal plus the interest gained.

Mutual Funds:

Mutual funds pool the money from multiple investors. This money is then invested in a variety of financial assets – such as stocks or bonds. These funds provide diversification and offer a wide variety of investment types. When you own shares of mutual funds, you participate in all the gains and losses of all the companies held in that fund. These funds are actively managed by financial professionals and typically have a management fee associated with them. Mutual funds tend to be less risky than stocks.

Index Funds:

Index funds track a specific market index. They are built to have a similar performance of the major market index that they track. When you own shares of an index fund, like a mutual fund, you participate in all gains and losses of the companies held in that fund. Index funds tend to be diversified in securities and include multiple different investments.

The S&P 500 is the popular example of an index fund. This fund invests in the top 500 stocks in the market. In other words, this ‘index’ tracks the stock market. Another popular index fund is the Nasdaq 100, which follows 100 large technology companies/stocks.

Index funds are inclusive of stocks, mutual funds, and etfs. Index funds are known to be a more conservative investment strategy than others such as stocks. They typically have lower fees associated with them compared to mutual funds, making them a great option for passive investors..

ETFs:

Exchange traded funds or ETFs are kind of like if a stock and an index fund had a baby. ETFs are investment funds that trade like a stock, but act as an index fund. Meaning they are traded on the stock exchange but they pool together money from investors into multiple different ‘baskets’ of different investments. These baskets include things like stocks, bonds, and other securities. ETFs provide investors with diversification as well as a wide variety of options. ETFs are considered a passive investing method. A big benefit of ETFs is that typically taxes are only when you sell them for a profit.

Real Estate:

This is a very different type of investment strategy than what we have discussed so far. Real estate investing is purchasing properties to generate rental income or appreciation over time.

There are multiple different kinds of real estate that investors can choose from. Residential or single family housing. Commercial real estate such as office or retail buildings, large apartment complexes, industrial buildings, or storage unit complexes. Residential or single family housing tends to have a lower cost of entry and is less risky than commercial real estate. Real estate is its own beast, so depending on what type of real estate you invest in will determine the risk.

Other Investment Options:

As I mentioned before, there are hundreds of options when it comes to investing and these are not the only options in the investing basics. Some other popular investing options are high yield savings accounts and/or certificates of deposits or CD’s. As well as different retirement accounts like an IRA, Roth IRA, or 401(K).

Tips for Investing Money Wisely:

• Start Now – The earlier you begin, the more time your investments have to grow. As shown in the compound interest example, time is your best friend when it comes to investing your money.
• Understand Risk vs. Reward – Higher-risk investments generally offer higher potential returns. If you prefer lower risk, expect more modest gains.
• Diversify Your Portfolio – Never put all your money into one investment. Spread your funds across multiple asset types to reduce your risk.
• Take Advantage of Compound Interest – Choose investments that allow you to reinvest earnings and maximize compound growth over time.
• Acknowledge That All Investments Carry Risk – Even the safest and most conservative investments come with some level of risk. Be prepared for market fluctuations.
• You Don’t Need a Lot of Money to Start – Many investment platforms allow you to start with small amounts and even purchase fractional shares.

Final Thoughts

Investing is a powerful tool for building long-term wealth, but understanding the investing basics is essential before diving in. If you learn how different investments work, you can make informed decisions and set yourself up for financial success. Whether you choose stocks, bonds, real estate, index funds, or something else, the key is to start early, stay consistent, and to keep learning.

Disclaimer:

The information provided in this article is for educational and informational purposes only and should not be considered financial, legal, or investment advice. Investing carries inherent risks, and past performance is not indicative of future results. Before making any financial decisions, consult with a licensed financial advisor or other qualified professional to assess your individual circumstances. The author and publisher are not responsible for any financial losses or legal consequences arising from the use of this information.