Because of the pandemic, financial wellness is on almost everyone’s mind. And for good reason—you’ve never had more motivation to think about how you can invest in your future, prepare for retirement, and protect yourself from difficult money problems. Financial wellness is a big part of a happy life and you may be wondering, what the heck is an investment, and how do I go about making them?
In today’s post, we’re kicking off our new Investment 101 series. This post covers the basics of investing. Other posts will cover budgeting, savings, financial wellness, and other money topics we think everyone should consider. We really hate how the financial industry can be confusing, full of gatekeepers, and without a lot of great options for marginalized investors (did ANYONE learn how to do taxes or save for retirement in school?) Women, BIPOC, disabled, neurodivergent, poor and otherwise oppressed folks are especially in need of financial support.
So, we’re changing that. The bell’s rung and class is in session. Let’s dive in!
What is an investment?
The most basic definition of an investment is “the action or process of investing money for profit or material result,” according to Oxford Languages.There are many kinds of investments and investors. In general, people put money into a project, stock, or other efforts in the hopes of making future profit, usually through interest or by a company producing more profits.
According to Nerdwallet, there are six types of investments:
- Mutual funds
- Index funds
- Exchange-traded funds (ETFs)
Buying stocks is a way to invest in a specific company, like “playing the stock market.” You’re purchasing a small piece of a company, and if its value goes up, so does the value of your stock. If you can sell a piece of stock at a higher price than you bought it, you’ve made a profit.
According to Vanguard,bonds are an agreement you make to lend your money to a company or government. You are purchasing the bond, and the issuer can use your money and pay you back with a bit of interest. Bonds are usually considered less risky than stocks, but they also may offer lower returns — which means less profit for you.
Mutual funds let investors purchase a large number of investments at once. Mutual funds pool money from many investors, and then an investment manager makes purchases of stocks, bonds, or other assets as they see fit.
Nerdwallet defines an index fund as “a type of mutual fund that passively tracks an index” without paying a manager to pick and choose investments, cutting out the middleman and reducing fees for you. An S&P 500 index fund aims to mirror the performance of the S&P 500 by buying stock of companies in that index. Index funds tend to cost less because they don’t have a manager or investment professional on payroll, and the risk will vary with the index’s performance. ETFs are also a type of index fund, and they tend to be cheaper because they aren’t actively managed, either.
Last but not least, Nerdwallet says, “an option is a contract to buy or sell a stock at a set price, by a set date.” Options are a little more complicated and not something we’ll cover extensively in our series, but it’s still good to know the lingo and what it means.
Investors have to balance risk versus rewards. Some investors like or are able to take more risks, while some take less.
But aren’t there new ways of investing that feel a little more modern?
If you’re a pretty news savvy person, you likely heard about the GameStop stock debacle, and we’ll be covering the power of small investors more in a future post. In short, smaller investors ruled the stock market and news cycle for a few weeks, banding together to boost GameStop’s stock even after big-time hedge fund managers kept trying to force the price down to make more profit (it’s called short-selling, and it can put even large companies out of business).
Most of those investors used an app called Robinhood, which is a lot easier to use and understand than traditional stock market websites and portfolio managers. Still, Robinhood caved to pressure and cut off trading when those small investors started making too much of an impact — not very “free market” of them. You’d be hard-pressed to find any investor who has made a career on Robinhood alone.
There are also powerful crowd-investing (different from crowdfunding!) platforms like Republic, which has more than one million members. And even savings accounts are different these days, with many digital-only banks. So yes, there are disruptors in the industry and while nothing is perfect, most of these platforms make investing far more accessible to marginalized communities that are normally left out.
The 3 Types of Investors: What kind of investor am I?
According to Financial Mentor, there are three kinds of investors:
- Passive Investors
- Active Investors
Financial Mentor describes pre-investors as anyone who isn’t currently investing. This person may have little money, little financial literacy, or be in college. They may have made a personal choice not to invest, or lack resources.
2. Passive Investors
A passive investor is described as someone who follows the “basic” or “common” rules of financial wellness: owning your home, funding tax-deferred retirement plans, balancing your assets, and saving at least 10% of your earnings. Pretty solid, safe advice.
3. Active Investors
An active investor takes a different, more aggressive approach, according to Financial Mentor. These investors take more risks, make their money work for them, and are generally looking for ways to increase their profits over time. This strategy isn’t for everyone because it requires a certain tolerance for risk.
The first step to investing is probably figuring out which of these three stages you’re in: most of us will probably fall into the pre-investor category, and that’s okay! Some of us may be in the passive investor stage, and that’s cool too.
Becoming an active investor to invest in your future
Our definition of an active investor is someone who is paying attention to their investments and learning more about overall financial wellbeing. The truth is, not all of us have the savings to take big investments risks, and a lot of financial advice doesn’t recognize that.
Instead, we’d encourage you to learn more about how you spend your money and create budgets that help you achieve your goals, like beginning to save for retirement or dipping your toe into investing for the first time. We’d encourage you to actively seek financial literacy while understanding that literacy still doesn’t solve income inequality and wealth gaps. It also can’t pay off your student loans, lower your college tuition or drastically change your financial situation. To us, a healthy, active investor is someone who is learning, making plans, and taking action where they can.
In future articles, we’ll dive more into how to make investment choices and how marginalized investors can get access to better opportunities and advice. We’re starting from the ground up, and we hope you’ll make good use of this stuff because it really should’ve been taught in school — but it’s never too late to learn!