Step 51: Investing through Mutual Funds

Step 51 of the 100 steps mission to financial independence: Investing through Mutual Funds
Step 51: Investing through Mutual Funds

In the previous step we looked at the advantages and challenges of choosing the shares and bonds to invest in yourself. In this new step we look at an alternative which is designed to help you if you don’t want to choose your own investments, but rather rely on the opinion and experience of somebody else: Investing through collective or mutual funds.

As we’ll see, this type of investing has its own major positives and drawbacks so let’s get started with the details.

Mutual funds – an overview
In the case of collective or mutual funds, the money of small investors in pooled together in order to raise the total amount available to invest. A fund manager is appointed to manage these funds and he or she decides which shares and bonds to add to the portfolio, trying to make as much money as possible. This often means they buy and sell continuously, following the market, aiming to buy shares at a low price, sell them at a high price and rush selling if they see a fall in the market coming, to avoid their clients losing a lot of money. Sounds like a good tactic? On paper yes, but in reality there are two main problems with this type of investing. Continue reading

Step 50: Investing through Handpicking shares

Step 50 of the 100 Steps to financial independence: Investing through Handpicking Shares
Step 50: Investing through Handpicking Shares

Now that we’ve discussed the what of investing (stocks and bonds and what the differences between the two are), it is now time to learn more about the how of investing and in particular how one can enter the stock market and start investing. Hopefully by now you’ve at least become slightly curious about how this investing really works, whether or not you feel like this will be your thing to do.

Generally speaking there are three different ways you can invest in a stock market:

  1. Handpicking shares (and bonds) of individual companies
  2. Getting a collection of shares and bonds through collective or mutual funds
  3. Passive investing through Index tracking or Exchange Traded Fund

We’ll look at each option in turn to find out more about each way of investing in detail. In this step we’ll start by looking at handpicking shares of individual companies. Remember that these steps are only an introduction to the complexity of investing, so don’t just take my word for it, but read up if you’d like to find out more. There are many good books, articles and websites around that will explain this all in greater detail.

To make things easier on me as well as on you when reading, I have decided to talk about “handpicking shares” where in reality I am talking about both shares and bonds (yes, you can call me lazy if you want..!) Continue reading

Step 49: The Difference between Shares and Bonds

Step 49 of the 100 steps to Financial Independence: The Difference between Shares and Bonds
Step 49: The Difference between Shares and Bonds

Stock markets have a vast selection of stocks and bonds that can be invested in and before deciding what to invest in, understanding the main differences between stocks and bonds well is absolutely key if you consider getting in the stock market. Investors can decide whether they want to invest in just shares, just bonds or whether to create their own mix of stocks and bonds. With time, many furthermore decide to slowly reallocate their investments, so even if you start with a certain percentage shares and bonds, this needn’t stay as such for the rest of your investment life.

Here we’ll look at the main differences between shares and bonds from an investor’s point of view and how they both offer different advantages and disadvantages.

Volatility

  • Share prices vary more day-to-day but also over long periods of time: their value can increase or decrease fast.
  • Bonds are generally more price solid and fluctuate less over time and at a much slower pace than shares.

Continue reading

Step 47: Understanding Shares

Step 47 of the 100 steps to financial independence: Understanding Shares
Step 47: Understanding Shares

Here starts a new part of our 100 steps to financial independence, with this being the first step in a mini-series on investing.

If you are serious about money, it is worth understanding more about the stock market and at least get a basic idea of what it is and how it works, before you decide for yourself whether investing will be something you would like to start doing. Investing is often a long-term decision and depending on the risks you are willing to take, you might or might not feel that investing is the right thing to do for you.

Let’s start with one of the key components of the stock market: shares (also known as stocks) and find out what they are, why they exist and how they make or lose us money.

What is a share

A share is basically a very small part of a company. If you have a share, it means you own a part of that very business and the more shares you have, the bigger the part you own of that company. Continue reading

Step 37: Income Stream 5: Dividend Income

Step 37 of the 100 steps to financial independence: Income stream 5: Dividend Income
Step 37: Income stream 5: Dividend Income

Time to look at our 5th possible income stream, which is dividend income. This type of income is based on company profits paid out to the shareholders of that company. Before you dismiss this type of income as not your thing, read on and then jump to the investing steps later on, as you’ll find that investing can be more or less risky, depending on the risk that you feel you can deal with and you can start with very little money, yet over the years build up a considerable portfolio.

Now back to the dividend income. If you have shares in a company, you basically own a tiny part of that company. If that company then makes a profit, some of that profit goes to the owners of that company, i.e. the shareholders. Continue reading