Those who have made the decision to become a working stay-at-home mom must now figure out just how they are going to earn a living. While there are many well-paying jobs that you can do from your home, there is another great way to earn money while you are at home: through investing. This investing guide will be a great help if you are new to investing.
While you do have to be careful to avoid traps, investing can provide you with significant extra income. It can also help you meet your long-term financial goals, such as paying for your children’s college education and your retirement.
But if you know nothing about investing, it can be a daunting challenge. This article provides valuable information that should be considered when starting to invest.
Important Investment Concepts
Before you can begin investing, you need to understand the important concepts that will help you judge investments. These include:
Return relates to how much profit an investment earns. If you invest $1,000 and receive a profit of $100, your return is 10%. This number can represent the amount of profit that you will earn over the life of the investment, or it can represent the amount of profit you will receive at a particular interval, such as at the end of a quarter or year.
The flip side of return is risk. This is the potential for you to lose all or part of the money that you invested. Risk is closely related to return, as investments with the highest returns often carry the largest risks. Conversely, the safest investments typically provide the smallest returns. Depending on the individual situation, the affinity for risk can vastly differ.
Diversification is a way to manage risk while still achieving high returns. While this word may sound complicated, the concept is quite simple. It’s like the old saying our grandmothers used to say: “don’t keep all your eggs in one basket.” Creating an investment portfolio of different investment types is one way to safeguard yourself from losing money. This way, if one type of investment goes down in value, your whole portfolio does not assume the same risk.
Some common investment types, such as stocks and bonds, go up and down in an inverse manner. This means that when stocks go down in value, bonds generally go up, and vice versa. By having a diverse portfolio that combines both stocks and bonds, you’re at less risk if the stock market experiences volatility.
While you can earn a profit when you sell an investment, many investments also offer passive income. This means that they provide you with regular income over the life of the investment, and you can look at this as a second income source. Interest-earning investments, such as savings accounts and money market accounts, provide passive income, but so do many stocks, through what are called dividends.
There are many good investment options available. Here are the two most common:
When investing in stocks, you are buying or selling an ownership interest in a publicly-traded company. While the price of stocks can rise or fall significantly at any given time, historically, they provide excellent returns for those who do not panic when the stock market experiences a downturn.
The big problem with stocks is that, if you are not an expert, it can be difficult to decide which individual stocks to buy. Fortunately, you do not have to do this. Instead, you can buy something called a stock fund.
Stock funds are collections of stocks that experts have combined into a single security that you can buy. Some funds contain a broad range of companies, while others are focused on certain types of companies. They also come in the following types:
Mutual funds are a collection of stocks that are actively managed by experts. Unlike stocks, which you buy from exchanges, you buy mutual funds from investment companies.
Exchange-Traded Funds (ETFs)
ETFs are similar to mutual funds. The difference is that you buy them on an exchange as you do with stocks. Because they are less actively managed than mutual funds, they tend to have lower management costs. They can also have tax advantages over mutual funds.
Index funds follow a particular stock index, such as the Dow Jones Industrial Average (DJIA). When the value of the index goes up or down, so does the value of your investment. Because index funds do not require active management, they can have very low fees.
Bonds are securities that are issued by either governments or corporations to raise money. In exchange for you lending them this money, they promise to return your investment plus a fixed amount of interest at the end of an agreed-upon term. Bonds are generally safer than stocks, and because of this, they generally offer smaller returns.
All bonds receive ratings, which represent the likelihood that they will pay you what they promised. AAA is the best rating, while ratings of BB or lower are considered junk bonds and are not suitable for ordinary investors.
Municipal bonds issued by states, cities, and counties, offer a special advantage: their returns can be free of both federal and local taxes. U.S. Treasury bonds, which the federal government issued, also offer returns that are free of local taxes. Treasury bonds have the advantage of being the safest type of bond that you can buy.
Investing is not so daunting once you understand everything that is involved. Using this information, you can take the first step toward reaching both your short-term and long-term financial goals as a work-from-home mom.
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