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How to Start Investing
Investing is a very wise thing to do since it can put the money you earn back to work for you and help you build a better future for yourself. Before we start discussing the how’s and why’s of investing, we should first define what it is.
Investing is the act of placing your money into an investment – a security, real estate, a business, or some other type of asset – in an area that you feel will bring profit or some sort of material gain. There is a great deal to consider when getting into the world of investing, like what your budget may be, what your goals are, and where you are looking to put your money.
There are also many different ways that you can start investing. They are all unique and offer different benefits for the people who pursue them. In some cases, people may be looking for an immediate short-term gain and may invest their money in the latest startup they’re aware of in the hopes of hitting a “grand slam,” or major return on the initial investment.
On the other hand, many people are more risk-averse, and would rather pursue an investment strategy that protects their money and realizes more modest gains. Many more people are somewhere between that spectrum. Regardless of what kind of investor you are setting out to be, it is important to understand your options.
Getting started as soon as possible is very important when it comes to long-term investment since it gives you more time for the type of compounding returns that earn you real money. However, it is never too late to start investing. The worst thing that you can do is wait until you understand everything because the truth of the matter is that you will never know everything there is to know about investing; no one does.
With that being said, you don’t want to blindly dive into investing as there is a certain level of risk in every investment. So, to get you started off in the right direction let’s take a walk through some of the most important things to consider when you are making the jump to become an investor.
Let’s get stuck into how to start investing!
Determine Your Goals
There are so many different ways to invest and each one will give a different kind of return. So, you must ask yourself what you want to gain out of these investments? Some of the most common goals when it comes to investing are:
- Retire Early
- Save For Your Child’s Education
- Leave a Legacy
- Buy a House
- Save Money to Start a Business
- Make a Difference Through Donating
If you enter into the world of investing with the idea that you are going to get rich quickly, then you are going to burn out quickly as this is never a sustainable motivator. Targeting your goals down to what you specifically want to get out of the money you put into your investments is going to make you want to invest for the long term and make the sacrifices necessary to be able to continue funding these investments.
In addition to that, you will get a good feel as to how much money you are going to need in return. Let’s take a new home purchase as an example. In most cases, you are going to have to place a substantial down payment on any home you purchase, especially if you live in an expensive state. So, from there, you are going to have to determine how much you would need to move into the house that you want.
When you set goals that are tied directly to a specific benefit (like buying a house) then you naturally commit to them for a longer period of time, which in most cases will give you a better chance of actually achieving those goals. So, the first step to becoming an investor is laying out what you want to gain out of placing your money into an investment that carries some level of risk. After all, you have to have a target before you can get a bullseye.
Determine Risk Tolerance
Risk is defined as the uncertainty that comes with your investments. In nearly every case, investments carry some level of risk, and there is a chance, that an investment can lead to a negative return, or lose money, and have a negative impact on your overall investment portfolio. It is very important to understand that when you make an investment you can lose money. The question to ask is how much money are you willing to risk? The answer to that question will be your risk tolerance.
Some people can wake up in the morning and see that their portfolio is down 12% and not panic. In many cases these investors may be younger, may have fewer bills and expenses to contend with, and have the ability to absorb losses that other people don’t. These people are said to have a high-risk tolerance. People who have this kind of tolerance are able to invest in some of the riskier areas, like more volatile stocks, startups, and cryptocurrencies.
Then, on the other hand, there are the people who would not be able to sleep at night if they found that they lost 12%. In this case, then some of the safer investments like bonds, ETF’s and even some life insurance policies can give you the leverage to achieve some of your financial goals. People who are closer to retirement, or who have limited means to invest, or are taking a long-term approach to their investments are typically said to be in this category.
In most cases, the riskier the investment the more potential upside that there is. However, as mentioned earlier, there are some ways to have safer investments that give you some decent returns.
When you are first jumping into the world of investing, determining your risk tolerance is usually a tricky thing to do. The reason is that you’ve never experienced a loss in the market. In order to really break down your risk tolerance ask yourself the following questions:
- What are you more concerned with, losing money or gaining money?
- How much money are you willing to lose before you cut your losses and sell?
- How would you react to a severe market decline?
- How often are you looking to track your investments?
- How old are you, and how long do you plan on investing?
Answer these questions to the best of your ability, there is no right or wrong answer. This is simply to determine where you should be putting your money. If you are young and plan to invest for a long time then you should be able to stomach a loss better than someone who is within five years of retirement, but then again everyone is different.
If you are still on the fence about your risk tolerance, then the best thing to do would be to diversify your portfolio, and own different types of assets that as a whole can weather changes in financial and economic situations. This can be done in a few different ways. You can have your entire portfolio diversified through proper asset allocation, which is a balancing of risk and rewards to achieve the most plausible results with as little risk as possible. A very basic example of a portfolio that values asset allocation is as follows:
- 30% Stocks
- 30% Bonds
- 20% Cryptocurrency
- 20% Life Insurance Policy
This is a simple and commonly used way to allocate your assets as you are mixing up the riskiest investments with the safest investments. There are so many other places that you can invest your money, but this essentially makes it so that you are in a position where you are able to gain a good amount of money while allowing yourself to sleep at night knowing at least some of your investments are safe.
From there, you are going to want to further diversify those different ventures. For example, in your stock portfolio, you should not just hold one stock as that is very risky. You should invest in a handful of different stocks so that if one falls in price, you have some other stocks to fall back on.
Modes of Investment
Now that we have determined your goals, risk tolerance, and how to diversify, let’s go through some of the most common types of investments. Some of them were mentioned above but in order to determine where the best place for you to put your money is you are going to need to get at least a basic understanding of each mode.
Stocks or equity are securities that represent partial ownership in a corporation. These are primarily bought and sold on different stock exchanges. As a shareholder, you are a participant in the corporation’s profits as well as its assets. The number of shares that you purchase is up to you, you can buy as many or as little as you please. Some brokerages even allow you to purchase fractional shares in stocks.
The price of a single stock is going to vary from day to day. As an investor, you are purchasing stocks with hopes that they will increase in value in the future. In the long term, a stock’s price is directly correlated to profits that the company generates. This means that you should invest in companies that you believe are going to continue innovating their business to grow their profits over the years. In order to determine this, there will be some research that will be required on your end.
How to Buy Stocks
Purchasing a stock has been made easier than ever in the world we live in. There are many brokerage apps and websites that offer either very low cost or no cost at all. All that you have to do is sign up with one of these brokerages and start purchasing stocks.
How to start investing in stocks; some of the most popular brokerages are:
- TD Ameritrade
REITs, or Real Estate Investment Trusts, are managed properties that pay out a portion of their profits to shareholders in the form of dividends. This is a great way to invest your money if you are looking for a dividend income. This will ultimately provide a good level of diversification from your stocks.
REITs work just like a stock does, only you are not investing in a singular company, you are investing in managed properties. This is great because the management is done for you; all you have to do is put your money into the right trusts. This makes it more appealing than investing in a rental property because you would then have to purchase and manage that property.
How to Buy REITs
REITs are traded just as a stock would be traded, but these are going to benefit you the most if you hold these for the long run.
How to start investing in REITs:
If you are looking to invest in a REIT, you can do so through all of the brokerages below.
- TD Ameritrade
A bond is a debt instrument that can be purchased in exchange for a fixed return. This works by an investor (you) who lends money typically to a corporation or a municipal, state, or federal government with a fixed interest rate in return. Bonds are a safer investment because you understand that you are not putting yourself in a position to lose money. There is going to be a lower rate of return for bonds due to the fact that you are not purchasing fractional ownership in a company.
The average annual rate of return for a bond is typically between 5% and 6% which is lower than what you are likely to see with stocks; however, though they are not entirely risk free, as an investor you can have greater peace of mind because you can be fairly certain that you’ll get your money back with a modest return.
How to Buy Bonds
Purchasing bonds is a little different than purchasing stocks. There are some brokers out there that allow for the purchasing of corporate bonds, but they are likely to charge a fee for their service. You can also purchase government bonds from some investment accounts or directly from the government.
Exchange Traded Funds
An exchange-traded fund or ETF is a bucket of securities pooled together to lower the risk of loss. This is the easiest and cheapest way to generate a diversified portfolio. Exchange-Traded Funds are traded the same way that stocks are traded. Some investors enjoy the idea of ETFs due to the fact that they aren’t as risky as a singular stock.
How To Buy Exchange Traded Funds
As mentioned above, ETFs are traded just like a stock would be traded. This means that they are sold the same way that stocks are sold. You purchase a set number of shares in an ETF for a specific price. These ETFs are available on all of the brokerages listed under the stock section.
Angel investing is a very interesting way to invest. The basis of this investment is to financially back a company that is just getting started. This is essentially funding a startup with hopes that it will one day become a successful company. Angel investors have historically been very high net worth individuals who invest large amounts of money into companies. Though in recent years, there have been laws passed that allow just about anyone to be an angel investor.
Investing in startups is very risky, far riskier than any stock. The reason behind that is that a company can flame out in a matter of months due to poor choices by the management team (which is often new) and you could lose your entire investment. However, despite this risk, there is also a potential for a very high reward. If you invest in a company that becomes highly successful you are looking at a very high and possible recurring payout.
If you are looking to invest in startups, then understand that this is going to take a very high amount of research and some level of experience. You are going to want to know everything about the company and the market it is in before you put any money into it. However, perhaps the most important aspect of angel investing is determining whether or not you believe in the person or team that is running the company. Anyone can think of a good business idea but only a few will be able to launch successful companies, so belief in the entrepreneur is more valuable than belief in the product in this trade.
How To Become An Angel Investor
Angel investing used to be much harder to get into than it is today. Now there are apps and websites that you can use to invest in companies. It is very similar to apps for stock purchases. Some of the most popular angel investing apps and websites are:
- Lets Venture
First, let’s start by saying that life insurance is not meant to be sold as an investment, but it does provide a safe place for your money to grow that can supplement your investments. Everyone should have a life insurance policy in place but for the sake of this topic, life insurance is a great place to put your money if you are looking to either lower your risk or leave a legacy to your family.
When you purchase a life insurance policy you are not making an investment, you are purchasing a financial product. Whole life policies contain a cash value that can later provide you with some financial security as well as a death benefit that will be left to your family. If you take some of the money that you have to invest and put it into a life insurance policy then you are setting yourself to have something to fall back on if your investments all drop in value, it is the perfect supplement to an investment for those who have lower risk tolerance.
How To Purchase Life Insurance
Life insurance agents are constantly looking for new clients. In order to purchase life insurance, you usually have to fill out an online form and then an agent will call you. From there they take you through the sales process and give you a package that will best benefit your family. After that, you pay the monthly premium and after a certain period of time, you will accumulate a cash value that you can borrow against.
Cryptocurrency is one of the newer ways to invest your money and it is getting a lot of mixed emotions from investors. Some people love the idea of cryptocurrency as an investment while others despise it. The truth of the matter is that it is new and exciting but comes with extreme risk.
Cryptocurrencies are extremely volatile, which means that they are prone to jumping up and down. There have been records of some cryptocurrencies losing more than half of their value in a matter of hours, though, on the other hand, there are some cryptocurrencies seeing returns of 1000+% in a matter of months. So, this can be a very lucrative investment but only if you do your due diligence and understand what you are investing in. Some cryptocurrencies will soar, and others will drop down to zero.
If you are looking to invest in cryptocurrency then you should have very high-risk tolerance. This mode of investing is not for everyone.
How to Buy Cryptocurrencies
Purchasing cryptocurrencies are very similar to purchasing stocks even though the two investment modes are very different. When you are purchasing a cryptocurrency, you are purchasing a number of coins, which is very similar to the number of shares that you would purchase in stock.
How to start investing in cryptocurrencies:
There are brokerage apps for cryptocurrencies that you can simply sign up for and start purchasing; some of the most popular cryptocurrency brokerages are:
Final Thoughts: How to Start Investing
The famous investor Warren Buffett once said that if you don’t make money while you sleep, you’ll work until you’re dead. If you want to live comfortably, you will definitely have to invest your way to wealth and make your money work for you. If you have money coming in through a paycheck, then try to start setting some of it aside to put into a vehicle that will allow you to realize a return on it. This is how you grow more wealth.
The most important thing when you’re just starting out with investing is understanding your mentality and what your goals are. If you are someone who does not like the idea of risking your money, then some investment opportunities are not for you. This does not mean that you shouldn’t invest, it instead means you should make safer investments.
Thanks for reading How To Start Investing.
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