When you hear your friends and colleagues talking about their latest stock picks, do you wonder how they know all that stuff? Even the idea of investing seems scary for people who don’t know how to invest.
Many people think that investing is only for the rich class. That’s not true. You can start investing with as little as $200. In fact, it is better to start investing at the earliest and see your money multiplying, thanks to the magic of compound interest. You just need to learn a few basics in order to reap the benefits.
Beginning of Investing Basics: Set Goals
The first step is to pen down the kind of returns you expect on your investments. It will give you a direction when deciding to put money in various instruments. For example, if you don’t want to take any risk and are happy with the low returns, the most appropriate choice for you would be a term deposit or online bank account. However, if you want reasonably high returns, direct share purchase and mutual funds will be suitable for you.
“If you’re investing your money for a particular objective, clearly state the objective before you start investing. You may be investing for your child’s college education, your retirement or any other purpose. The level of risk you have to take entirely depends on two things: the objective and time limit,” says Matt Krantz, a financial reporter and author of Fundamental Analysis for Dummies and Investing Online for Dummies.
When setting goals, be realistic. It’s worthless to pour money in stocks, bonds or mutual funds if your credit card carries a heavy debt at high interest rates. Get rid of the credit card debt first. Also, ensure that you have at least 3-6 months of expenses in your emergency fund.
Investment Instruments
As a beginner, you should be aware of the most common investment instruments: stocks, mutual funds and bonds.
When you purchase stocks (shares), you get partial ownership in the firm. As a shareholder, you will get a part of the company’s total profits every year, called dividend. However, people usually don’t invest in stocks to get dividends. They expect the stock prices to rise over time. Stock prices fluctuate based on the company’s perceived value and its net value on the paper. The success mantra to invest in stocks is to buy at low prices and sell when the prices go up.
Another tool is mutual fund. A mutual fund is run by the professional money managers. It collects money from thousands of investors like you and then purchases a portfolio of stocks, debts, bonds and other securities. The biggest advantage of mutual funds is that your money is invested in a diversified portfolio that reduces the risks. If one company in the portfolio loses money, the gains from other companies will make up for the loss, thus yielding a decent return.
Professional investors consider bonds one of the safest investments. In simple terms, bonds are a type of loan where the investors lend money. A common example is our Treasury Bond or T-bill. The investor is directly loaning money to the US government when she buys a T-bill. There are other types as well, such as corporate bonds, municipal bonds, etc. Since they are extremely safe investments, bonds yield very low interest rates.
Choose a Broker
Before you start investing, you have to open a brokerage account. You can’t directly trade the stocks, bonds or mutual funds. You have to tell your broker which item to buy or sell, and they will charge a “commission” for their services. Their fee ranges from as low as $5 to hundreds of dollars.
There are two types of brokers: traditional brokerages and discount brokers. Traditional brokers offer a wide range of services such as advising on the instruments and companies suitable for you. Discount brokers charge a much lesser fee, but they do only what you tell them to. They do not offer any advice, so they are more suitable for self-directed investors. Brokerage firms like Charles Schwab and Merrill Lynch offer both types of services, allowing you to choose the format you like. Some of the most popular discount brokers are TD Ameritrade, E-Trade Securities and TD Waterhouse.
Nowadays, you can also find many online brokers who fall in the middle of traditional and discount brokers. They charge $15-$30 per trade, but offer you good support and guidance.
Know The Strategies
The best investment strategy is diversification. Spread your money over several instruments to reduce the risk. Usually, when one investment is yielding higher returns, the others may be plunging. By putting your money in a number of investments, you are likely to yield decent returns even if one investment take a downturn. Billionaire investor Warren Buffett says, “Do not put all your eggs in one basket.”
Build Your Portfolio
Now that you have learned the basics of investing, it’s time to build your portfolio of well chosen instruments. Your portfolio should consist of stocks, mutual funds, bonds, REITs and other instruments. Aim to diversify your portfolio, so that you won’t lose everything even if you make a mistake.
Let me know if this was helpful to you. My goal is to provide my visitors with useful and helpful money management tips so that you can obtain your financial goals. Leave a comment below. I’d love to hear from you.