How to Start Investing the Smart Way

What is investing? How does it work? How will you benefit from it? These are the basic questions you need to ask yourself if you are contemplating about investing in the stock market.

Investing is defined as expending  money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.

There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don’t always require a large sum of money to start.

1. Before investing, make sure to bring order to your house first.

What do we mean by this? It’s simple. Do not give what you don’t have or give everything you have,

You do not give what you do not have, nor give everything you have. So, make it a point to build your financial stability before considering investing. Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim.

It is advisable to create an emergency fund and a decent savings before you set aside money for investing. Whatever money you decide to put for investment must be an amount you are willing to lose, or if you do in fact lose it, won’t hurt you that much.

Step 2: Learn The Basics

If you want to play the game, you better know how to play. Don’t worry, though. You don’t need to be a financial expert to invest. You just have to learn some basic concepts or terminologies.

Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification and market efficiency. Read books, follow investing blogs, and find peers who have been in the investing business for quite some time for more practical advice.

Step 3: Set Goals

Once you have established your investing budget and have learned the basics, it’s time to set your investing goal.

Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. We all have different needs, so factor that in.

Step 4: Determine Your Risk Tolerance

Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Your risk tolerance will vary according to your age, income requirements and financial goals.

You ability to tolerate risk may depend highly upon your financial security vis-a-vis investment goals. If your goals are higher, and financial stability is unsure, risks are pretty high. So, take time building financial safety nets.

Step 5: Find Your Investing Style

What is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up.

If you love fast cars but are looking for safety of capital, you’re better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities.

Step 6: Learn The Costs

There is no such thing as free lunch. That is the first and foremost rule of business. Learn the cost of your investment efforts.

With regard your asset management, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees.

Note: Passive management is a style of management associated with mutual and exchange-traded funds (ETF) where a fund’s portfolio mirrors a market index. Passive management is the opposite of active management in which a fund’s manager(s) attempt to beat the market with various investing strategies and buying/selling decisions of a portfolio’s securities.

Step 7: Find A Broker Or Advisor

Every master was once a humble student. And so are you. You need an expert view on your big investment decisions.

Although the type of advisor that is right for you will depend on the amount of time you are willing to spend on your investments and your risk tolerance.

Step 8: Choose Investments

Choosing your investment style will greatly depend on your financial security and stability, and your tolerance to risk.

If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket.

Step 9: Keep Emotions At Bay

Don’t let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic.

Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls.

Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach.

Step 10: Review and Adjust

The final step in your investing journey is reviewing your portfolio. Once you’ve established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing – the process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.

Adapted from: Investopedia


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