While it may be tempting to conflate financial investing with gambling, for those with the requisite understanding, investing is far from a game of chance.
That being said, like gambling, investment success requires knowledge, planning and a little bit of luck.
By following this beginner’s guide to investing, you can start to get a sense of what it means to be able to invest with confidence.
Define Your Financial Goals
Why are you investing money? (Is it for a new house, college, or retirement?
Start by making a list of your life’s goals; and measure them against your current income.
Next, set an aggressive yet achievable calendar setting forth when you want to accomplish your goal(s).
For example, if your plan is to buy a new home in the next 5-years, then work backwards and calculate how far you are from your goal; and what you will need to earn between now and then in order to attain it.
Make a Financial Plan
You need to take an honest look at your current finances, and make a plan to help you pay off current debts and achieve items on your financial goals list.
Do Your Homework
Before you invest, you need to know the different types of investments. The most common types are stocks, bonds, and mutual funds.
Purchasing stock or a share of a company makes you part owner of that business. You can vote at shareholder meetings and receive company dividends.
Stocks can be risky, however, because they have a tendency to fluctuate wildly – often on a day-to-day basis. As a result, some stocks won’t return profits. However, stocks do have the potential to return high dividends. When it comes to investing in the stock market, always be mindful of the importance of buying low and selling high.
Bonds are fixed income securities. Unlike stocks, investing in bonds is seen as a much less risky proposition.
When you buy a bond, you are loaning your money to a company. Money is earned through the payment of interest on that loan.
Most bonds have a guaranteed return rate. However, the returns are typically low. In other words, you will not get rich from investing in bonds. This is a much more conservative investment strategy that provides a steady payoff over time.
- Mutual Funds
When you invest in a mutual fund, your money is pooled together with that of other investors – to buy a group of different stocks and bonds that are placed together with a specific strategy in mind.
Choose an SEC Registered Investment Broker
After you arm yourself with the basics of investing, it’s time to hire a professional financial adviser/broker. Just make sure that your adviser understands your financial situation and your ultimate goals. It is then his/her job to design an investment strategy which is narrowly tailored to fit your needs.