How to Invest Money

With copious information on personal finance and investing flying around the internet, it's easy to get confused or stuck if you're just getting started or considering investing. You might even think that investing is for wealthier or older people further along in their careers than you. While you may not entirely be wrong, the reality is different. 

Regardless of your age, income or career, you can access many ways to invest your money or build a robust portfolio that increases the likelihood of achieving wealth over time. These methods may include using stocks, bonds, index funds, mutual funds, real estate or fractional shares. You can also invest in digital assets like cryptocurrency and non-fungible tokens (NFTs). 

However, the right strategy for you will depend on how much extra cash you have, your risk tolerance and when you might need to access your money. Whether you wish to fund your retirement,  build wealth, get out of a financial jam or increase your purchasing power over time, Benzinga spotlights how to invest your money and make it work. 

How to Invest Money

To maximize your chances of profiting from your investments, you need a constructive understanding of how to invest money. While no style or strategy guarantees optimum returns, the best approach is the one that suits your goals, budget and risk tolerance. You can find many styles to go with.

Active Investing

Active investing style or strategy takes a hands-on approach and often requires a professional fund or portfolio manager to oversee the investment — that is, researching and identifying potential investment opportunities and determining where and when prices will change, putting into consideration various quantitative and qualitative factors reviewed by their team of analysts. 

The core goal is to beat the stock market's average returns by leveraging short-term price fluctuations. Active fund managers consider the market inefficient, creating opportunities to find undervalued and mispriced companies. It often involves in-depth market analysis and expertise necessary to understand when to pivot into or out of a particular stock, bond or asset. 

Actively managed funds typically have a full-time staff of financial researchers and portfolio managers constantly seeking ways to increase returns for investors. Keep in mind, though, that you'll be paying a premium for this service. If you're actively investing, ensure your fund manager knows when to buy and sell. 

However, suppose you've got the requisite skills. In that case, you can research investment opportunities and, based on your research, construct and manage your portfolio in a way that works for you.

Passive Investing

Passive investing — passive management or index investing — involves putting your money in an investment vehicle that does all the work for you. Unlike active investing, passive investing is a long-term strategy that's based on the concept that the market is well-priced and efficient.

While active fund managers pick the shares in active investing, passive investment vehicles track or replicate the composition of an index, such as the S&P 500. Mutual funds and index funds investment are examples of this type of investment. It is a low-cost and diversified approach to investing. Although profit turnover can be slow, passive investing produces good long-term results while requiring far less effort.

Growth Investing

In the growth investing style, you invest your money in companies having strong potential for future growth — high return on equity, high-profit margins and low dividend yields. The idea here is to focus entirely on growth and earnings potential.

Growth investment vehicles are stocks or shares of companies from emerging industries or industries with innovative products or services, primarily technology and healthcare. The thought process behind this investment style is that an innovative firm with ample capital will reinvest most or all of its earnings to fuel future growth.

Value Investing

Value investing can be considered the opposite of growth investing. Here you'll be hedging your bets on undervalued or underpriced industry leaders. 

Value investors seek companies undervalued by the market, meaning their stock price is less than they believe the company is worth. When evaluating value investments, analysts look for low price-to-sales and price-to-earnings ratios and typically higher dividend yields. Ultimately, the value style places a greater emphasis on investor behavior and its impact on price action.

Small-Cap or Large-Cap Investing

This investment style focuses primarily on a company's market capitalization. The market capitalization of a company is a product of its share price and the total number of outstanding shares of stock. It can be a great pointer to a company's size. 

Because they have more growth opportunities and are more agile, some investors believe small-cap companies should be able to produce better returns. However, with the high-reward potential comes increased risk. If you're looking to take advantage of the potential for higher returns, you must feel comfortable taking on this additional level of risk.

Less risk-tolerant investors might feel more secure in large-cap stocks because they tend to be more reliable. Many well-known brands, including GE, Microsoft and Exxon Mobil, can be found among the large caps names. Because of their large size, these businesses might need more time to expand. They are also less likely to close their doors without warning, meaning lower risk. Investors can anticipate slightly lower returns from large caps than small caps but also less risk.

How to Budget for Investing

Once you've determined the best approach to invest your money based on your risk tolerance and other factors, you must start thinking about budgeting. Here are some tips to help you determine how to build an efficient investment budget.

Identify your financial goals: What is your financial or investment goal? Is it long-term or short-term? Are you investing for retirement, a down payment on a house or education? For instance, retirement investing (IRA and 401(k)) has maximum legal contributions; identifying and understanding your financial goals will help determine how much you need to save and invest.

Determine your income and expenses: You need to know your monthly expenditures and how that outflow compares with your income. You can create an expense sheet for an accurate estimate. With your income and expenses sheet as a guideline, you can determine how much you can afford to invest without hurting your bottom line. An expense sheet can also help you to minimize overspending.

Set an investment goal: If you're planning to invest with capital from your wages, your budget should factor in a fixed investment and savings quota based on your financial situation. A good rule of thumb is to target a budget that uses at least 10% of your income for investing. And once you have a reasonable budget, stick to it and avoid investing beyond your means. 

How to Judge Your Risk Tolerance

Not all investments yield successful results. Risk tolerance refers to your ability to endure losses and how often you can endure them before profitability. Considering the following questions will help you accurately judge your risk tolerance.

What is your financial situation?: Do you have enough income and savings to cushion losses resulting from your investments? Your financial situation can influence your risk tolerance. Evaluate your income, expenses, debt and savings to determine how much financial flexibility you have. While having some non-invested savings for unforeseen financial emergencies is a good idea, having a large chunk of money in non-invested savings means you're risk-averse.

What are your investment goals and reaction to short-term volatility?: Do you panic when the market declines short-term, or can you bear short-term losses for long-term gains? Often your reaction to a short-term downturn determines your goal. If you often panic when the market turns negative short-term, you're risk averse and suited for a short-term goal. The reverse holds true.

What is your time horizon?: How soon you need to access your investments can determine your risk tolerance. Compared to someone who needs the same amount of money in five years, someone who needs it in fifteen years can take on more risk.

Are you approaching retirement?: Usually, the older you are, the lower your risk tolerance. Younger investors have more time than older investors to earn more money to take on more risk and market volatility.

What is your portfolio size?: The larger your portfolio, the more tolerant it is to risk. A portfolio size of $50 million will allow an investor to take on more risk than one of $5 million. In the event of a value decline, a larger portfolio will experience a much lower percentage loss than a smaller one.

Compare the Top Investment Platforms

Benzinga compares and offers insights on how to invest your money in stocks of insurance companies, virtual payment platforms and the best exchanges for investing.

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