Investing 101: Make The Most Of Your Money
For many beginners investing 101 can be scary and confusing. However, the more you get into the world of investing, the more you will begin to understand its concepts and theories. Actually, the financial world is not as intimidating and complicated as it looks from outside.
The only thing that can help you in becoming a successful investor is to know “what to do” and “what not to do”. When you are clear in your head that it’s only you who can make the best decisions about your money, you get it all right. This article will help you understand the important basic concepts about the investing that will lead you all the way to becoming “a good beginner investor” from “a newbie” in this field.
Let’s begin with understanding the things you should never do:
- Don’t trust anyone – Once you begin learning about investing, you will find a wealth of information. However, not all information is reliable. Don’t just listen to any investment guru because they are on the television. They may never have experienced a market you are getting into. Begin to find your own way of investing by reading reliable books and magazines rather than following others’ advice blindly.
- Don’t speculate – Always remember that Investing is not betting. An investment made without thorough analysis is no better than throwing your money in the trash. Stock investing 101 quality tip — never rush to buy a stock based on a “hot tip”. A real trader never acts upon any guesses because an investment is not placing a bet at a casino. It is something that can take away everything from you if you indulge yourself in speculations.
- Don’t think about how much you wish to make – Yes, it’s the silliest question you can ever ask yourself; instead, ask yourself how much are you willing to lose? Your investment should always be a calculated move based on the amount of risk you are willing to take. First, get acquainted with the nature of the market and then think about increasing your investment and widening your diversification. But again, be consistent with your tolerance of risk.
- Don’t make emotional decisions –Your emotions are your biggest enemy. An emotional investor can end up losing everything. If you get too optimistic about hot new companies or feel too pessimistic to even open your monthly statement, you need to check yourself. Your emotions and your financial should never be mixed.
Now when you have understood what to avoid while beginning as an investor, let’s understand some basics of Investment 101:
► Why Investment – If you have plenty of cash then instead of keeping it under your mattress, invest it. If you don’t invest then inflation, in the long run, will wear down your buying power and the value of your money.
► Before you begin to put money into stocks or bonds, you should settle up your high interest credit card debts. The interest accruing on your debt will more than offset any gains you would make with your investments.
► Kinds of Investment: There are many types of investment, you can make but ultimately it’s completely up to you and your situation where you want to invest:
1) Cash or equivalent – You can earn interest on the money in your bank account and some other “cash” investments like:
They are safe with low risks but have lower rates of interest.
2) Stocks – When you buy stocks, you get a piece of a company. You can profit in two ways:
- When the stock value increase.
- When the company pays a dividend.
Stocks are more risky than most investments.
3) Bonds – Buying a bond means lending your money to a company or the government for a certain period of time. In return, you get interest on a fixed rate and the face value of the bond on its maturity. Since bonds are long term investments, you get better return rates with them than cash, but not as good as stocks. However, not all bonds come with guarantee, so they are riskier than cash, but not as risky as stocks.
4) Mutual funds – They are a collection of investments pooled together into one asset. Different funds focus on different investments, such as:
- Stocks from big companies
- Government bonds
- Stocks from specific countries
- Even a mix bonds or stocks
The risk level depends upon the fund’s investment mix.
5) Alternative investments – These investments are the OK options if you have a huge amount of money and you wish to broaden your diversification. Such investments include:
► Diversification – When you diversify your investments, you invest in several asset classes. It gives you security of not losing everything if a company doesn’t do well. The best thing is to build a portfolio that includes both stocks and bonds.
► Asset Allocation – Asset allocation is the most important factor to build up a portfolio that is less risky. In this process, you decide how much percentage of your portfolio you will invest in different asset classes, such as- cash, bonds or stock.
► Dollar Cost Averaging – This is a very simple but important way of investing. Dollar Cost Averaging means putting a fixed amount of money every month into an investment.
In the end, the two most important parts of investing are:
- Setting up a well researched investing plan that fits your life situation sticking to it over time.
- Switching from investing plan to investing plan will kill your money over time even if each plan by itself is high quality.
Check out this video on “Investing 101″: