Author: Marissa Hayden
Let’s face it, being young today is hard. Rent is expensive, food is expensive, uni is expensive and the less said about housing the better. But even if it takes hundreds of years of forgoing a $20-per-week smashed avocado obsession to save up a house deposit, that doesn’t mean you can’t start investing now.
Start sooner rather than later
If you start saving when you’re young, even if it’s only a small amount, you have time on your side to grow your money. A little saved now can add up to a lot down the line, especially with the help of compound interest. Compound interest is a strange and powerful force that, over time, can make a huge difference to your investment.
And, thankfully, with the help of online share trading platforms, you can start investing with as little as a few dollars!
What should you do before investing in stocks?
Before you go racing off to invest, it’s a good idea to make sure that your finances are in good shape. Make sure that your bills are paid and your credit card doesn’t have a mountain of debt.
There’s not much point in making a killing on the stock market if the power company is going to shut off your lights. Furthermore, if you have a heap of credit card debt, it’s likely the interest you’re being charged will outweigh the gains you can make through any investments. So it might be worth tackling that first.
If you’re in a stable enough position that you can afford to set aside some funds, you can start having a look at what’s available out in ‘finance land’.
Ways to invest
There is a seemingly endless array of ways you can invest: shares, ETFs, managed funds, property, gold and more.
Everyone’s situation is different, and an investment that suits your friend might not be a good fit for you. Hiring a financial adviser can be a bit pricey, but it can also be a great way to identify what’s right for you. Of course, doing your own further research can help, too.
Whether or not you decide to engage with a financial planner, it’s probably still helpful to get an understanding of the investment options available to you. Below are some of the most common ways to invest and what they offer.
Old fashioned but no less important, buying shares is still very much a part of many people’s investment portfolios. Buying and selling shares can be a bit intimidating for a first-time trader, and it generally requires a bit more involvement than some of the other options. However, typically, what it does give you is direct control over your investment, and you can pick and choose exactly what you want to hold.
The mantra of buy low, sell high remains true, but it’s not the only way to cash in on stocks. You can also receive dividends if the company makes a profit. Buying individual shares is perhaps not the most beginner-friendly approach, and you will need to consider the risk element involved in this type of investing. However, it is often easily customisable to your needs and interests.
Bought and sold like a share, an ETF actually pools together the money of many different investors, which is then used to buy shares across a portion of the market.
So, every time you invest in an ETF you are in effect making a small investment in each of the companies captured in the ETF’s portfolio. ETFs are a fairly straightforward investment option and cover a wide variety of market sectors.
Some ETFs seek to replicate an index, like the top 50 companies in the New Zealand Securities Exchange (NZX), while others may invest in the ASX200, or tech stocks, the energy sector and more.
Bear in mind most ETFs aim to replicate an index, not outperform them.
3) Managed funds
A managed fund pools your money just like an ETF, but instead of passively tracking an index, it is actively overseen by a manager who tries to make the best returns they can for you by choosing what stocks to buy and sell. A managed fund will have a particular strategy that the fund manager employs, like investing in high-risk New Zealand shares or low-risk government bonds.
The fund manager hopes to outperform the market with their strategy, but there is always the risk they will underperform. Nevertheless, these funds are another popular investment option for those just starting out.
→Related article: How To Choose a Managed Fund
OK, so you won’t get to enjoy your money until you retire (or want to buy your first home) but putting more money into your KiwiSaver now will mean you have more later. This could be through upping your contributor rate or by making additional voluntary payments. Furthermore, the restrictions on withdrawals can help resist the temptation to take your money out.
While not as popular as it once was, cryptocurrency is another way of investing your money. If you’re starting out and want to learn more about the pros and cons of investing in cryptocurrency, you can see the latest trends at Canstar’s cryptocurrency hub.
However, it’s important to be aware that cryptocurrency is likely the most high-risk and unpredictable investment mentioned in this article, and is not suitable for everyone.
7) Term deposits
When you invest in a term deposit, you are agreeing to set aside an amount of money for a set time period (a term), and during this time you will earn interest on your investment.
Term deposits are popular with investors who prefer guaranteed returns over the fluctuations of the stock market. However, the investment returns from term deposits are typically lower than the potential gains of other more risky investments.
As a result, term deposits are more suitable for making small but certain gains when you can’t afford short-term volatility. For example, if you need to access your capital in six months’ time, a term deposit can help you make some gain, without the risk of the volatility you would get if you invested in shares.
Do note that if you need to access your money before the term is up, you’ll likely earn a reduced rate of return.
→Related article: Best Term Deposit Rates
Future you will thank you
Diving into the world of investments can seem a scary and confusing thing to do, but it is never too early to start. Consider your interests and needs and how much you have to invest. And while buying a house might be a few years away, you can at least start saving for it, or at least start making your money work harder for you.
About the reviewer of this page
This report was reviewed by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.