Finance experts provide investing tips for beginners

Investing can be intimidating for anyone inexperienced or with only a beginner’s knowledge of the subject. However, investing continues to be a practice many are encouraged to take part in.

Investing is putting money into a project (such as an asset or businesses) to make a profit over time. Devon O’Brien, graduate from University of Houston Main Campus describes investing as deferring money now for more money later.

“This is done by purchasing assets,” O’Brien said “Parts of businesses, land, means of production and then benefiting from their cash that they provide.”

O’Brien graduated in 2020 with a bachelor’s in economics. O’Brien began practicing investing in college.

Some reasons one might want to invest are to help start a business, save for retirement, save for graduate school or help reach some financial life goals.

When investing there is always a risk, something Ivelina Pavlova-Stout knows, as a Certified Financial Planner (CFP) and Professor of Finance in the College of Business at UHCL.

“I would say the first thing you need to figure out before putting any money at risk with stocks and bonds is do you have your emergency funds that will let you survive for three to six months if you lose your job,” Pavlova said. “Once you have an emergency fund set up, ask yourself how much risk you are willing to tolerate. At this point you can start looking for a brokerage to start investing.”

Risk is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of an original investment. One can  reach out to a Certified Financial Planner (CFP) for assistance and guidance with investing.

Pavlova said people usually start with stocks and bonds. Often you will hear these two terms used together. Holding stock in a company means having ownership or equity in that firm. A bond is a debt security that a company issues and makes available to buyers.

Prices in the stock market are driven by supply and demand. This makes the stock market similar to other economic markets.

“When we look at stock prices, they always shift because they respond to the information that is coming out about the company, about the market, about everything,” Pavlova said. “It is like a reflection of all that information.”

Similarly, the interest rate also fluctuates. Interest rate is the return on a debt investment.

“The Federal Open Market Committee (FOMC) controls the money supply and can influence these interest rates, which is the cost to borrow money for companies and banks,” Pavlova said. “When inflation is high, they have the power to raise the interest rates, the banks and the interest rates to the entire economy and hopefully bring down inflation when the economy is doing badly. Recently, there was an announcement from the [FOMC] Chairman that they are looking to raise interest rates again. They are seeing that inflation is high and continues to rise. They want to put a stop to it, so they raise rates. So the stock market hears this news and companies are thinking okay if they raise rates again does that mean the cost to borrow money is more expensive? Does this mean real estate will slow down and there will be less purchases? This news and information get reflected into stock prices. So there really is a correlation between the Federal Reserve and the stock market. Eventually, interest rates will affect the way companies function and how they raise capital and affect their operations.”

Inflation is something to keep an eye out for when investing. Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. Pavlova said she likes to keep an eye on the stock market news by using CNBC.com

Pavlova said another good way to begin investing is through index funds.

“For example, ETFs are Exchange Traded Funds that trade just like regular stock,” Pavlova said. “You can buy them from any brokerage account. The benefit is that instead of having a person pick out stocks and charge money for that fund manager, you just have a fund that has the same composition as a particular index, like the S&P 500. This is the index of the 500 biggest companies in the U.S. So instead of buying 500 different shares of stock, you can buy just one share of this fund. This fund will buy stocks from the 500 companies. This way you can start small. Some brokerages even allow you to purchase fractional shares. So say you only have $100, you can just invest that $100 and have a fraction of a share.”

Aside from stocks and bonds, O’Brien recommends investing using Roth IRAs.  Roth IRA is a type of IRA which you can contribute after-tax dollars.

“Investing using a 401k, Roth/Roth IRA is a great way to make sure you are financially secure and independent from traditional lines of work,” O’Brien said.

 The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax free and be withdrawn tax free after a certain age.

“If saving for retirement is your main goal of investing, this [Roth IRA] might be something to look into,” Pavlova said.

O’Brien had some advice for students wanting to begin their investing journey.

“Just have fun watching companies you believe in,” O’Brien said. “Right now when we are young you can speculate on the stock price of a company like Tesla, or you can spend that time and invest in yourself. The market is constantly telling you what it thinks things are worth, but you have to do your own research to determine what something is worth to you.”

Pavlova recommends the following resources for beginners in investing: Bankrate, CNBC, Fidelity and Nerdwallet.