If you have a lot of cash set aside for emergencies, such as surprise medical bills, home and car repairs, or a spell of unemployment, it's important to keep it in a savings account. But if you have money you don't expect to need for many years, then it's worth opening a brokerage account and investing it.
When invest the money, you have the option of making it grow into a much larger sum (whereas if you leave all your money in a savings account, you risk getting stuck earning minimal interest for years and years). But investments come with risks, such as losing money if you choose stocks or other assets that eventually decline in value.
If you are new to investing, you may be afraid to start buying stocks and expose yourself to potential losses. But here's why you shouldn't be nervous.
1. You can start slowly and build up over time
If you've never invested before, it's understandable that you don't necessarily want to deposit $ 20.000 into a brokerage account and start buying stocks. But you don't have to. Even if you have the money, if the idea of investing a large sum at one time makes you nervous, don't. Instead invest $ 1.000 and see how it goes. Once you are comfortable, you can add another $ 1.000 to your account, and then another, until you reach the maximum level.
2. You can minimize risk by diversifying
Whatever way you invest your money, there is a certain degree of inherent risk. But it is possible to minimize that risk by putting together a diversified mix of investments. If you buy stocks from different market sectors (for example, some technology, energy, healthcare and banking stocks) and one or two specific sectors go down, the value of your portfolio could go down, but not necessarily to a terrifying degree.
3. You can choose exchange-traded funds if you are nervous about selecting stocks by hand.
If you are new to investing, the idea of choosing stocks can be daunting. However, many brokerage accounts offer educational resources that teach you how to buy stocks and value companies. But if the idea still doesn't convince you, you can start by investing in ETFs, or exchange-traded funds.
When you buy the shares of an ETF, you are effectively buying a whole group of companies in one go. There are several types of ETFs that you can add to your portfolio, but if you are a nervous newbie, you may want to check out the S&P 500 ETF. The S&P 500 Index is an index that encompasses the shares of a group of companies. The S&P 500 is an index that includes the 500 largest publicly traded companies, so buying shares of an ETF that follows that index effectively means buying a piece of 500 different large companies, without having to research any of them.
Investing for the first time can be intimidating, but it doesn't have to be. And the sooner you open a brokerage account, the sooner you can start growing long-term wealth.