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A Beginners Guide to Investing

Most people invest for one main reason: to make money.  The money sitting in your savings account and your checking account isn’t earning you anything, so the thought of earning money from your money is exciting, and that’s where investing comes in.

Investing involves risk, and for some, that adds excitement to the process.  It doesn’t matter what you’re investing in, be it in stocks or mutual funds, there will be risk involved.  The value of your stocks might plummet overnight, and your bonds might simply decide to stop paying interest, leaving you in the dust.  However, with patience and good advice, investing can be incredibly rewarding.

Ways to Invest

For the purposes of this article, we’ll focus on investing being carried out in two ways; stocks and mutual funds.  These can each be completed with the help of a stockbroker, or alone, over the Internet from online brokerages like Scottrade and TradeKing, or telephone.

Stocks

  • Buying stock from a stockbroker:
    • Essentially, you tell your stockbroker how many shares you want to purchase at that given time.  Your broker will then send in the request to either the New York Stock Exchange or NASDQ, where the order will be received and handled within minutes.
  • Buying stocks online without a broker
    • By purchasing your stocks online, you are eliminating the middleman, in this case the stock broker.  Your purchases are completed online where they are sent to either NYSE or NASDQ to be executed.

Mutual Funds

  • Buying a mutual fund through a stock broker
    • With mutual funds, you are authorizing your broker to buy either a certain dollar amount of a fund, or a certain number of shares.
  • Buying a mutual fund directly from the mutual fund company
    • This is a simpler option, because it can usually be done over the phone or online, and requires little hassle.   Call or enter in your order, and it will be fulfilled at that day’s closing price.

Forex Trading

This is broken down to simply currency trading.  Forex is also known as Foreign Exchange market.  It is technically the largest market in the world and dwarfs the stock market.  Forex is one of the hot new trading trends.  It used to be done by larger banks and investors, but with the influx of websites that allow you to trade currency, anyone can do it.  Anyone looking into trading Forex should start small and not dump all of their money into the market.  There are many sites that will teach you how to trade Forex, so make sure you do plenty of research before you jump into currency trading. The key to succeeding in Forex is to research and find some great forex brokers to help you through it. It’s not a long term type of investing strategy, so don’t think you can set it and forget it.

Strategize!

invest dictionary term

© Stocksonwallstreet.com

Strategy is everything.  Sticking to a plan is a much safer route than giving into temptation and hot trends.  It’s important to understand that investing is a long-term commitment.  You won’t see changes overnight.

Give yourself at least a 5 to 10 year window for your investments to burgeon.  Now, there’s no rule suggesting that you must hold on to stocks for this long, but your changes of earning significant money off of them are higher when you do.

Another important factor in investing that one should be aware of is diversification.  Make sure your investments reflect a diverse market.  Having all of your investments in one niche market might sound convenient, but will come back to haunt you if that particular market takes a dive.  Professionals suggest investing in at least five different industries, with two or three stocks per industry.

investment puzzle

© arborinvestmentplanner.com

Finally, decide what to buy.

While it’s tempting, try not to get caught up in any trends.  Rather, invest in a solid company with good management, a good reputation, and commendable standards.  Don’t invest in a company because you work there, or because someone you know works there.  It may be your favorite place to shop, but you don’t know anything about their finances, and for all you know, they could be going bankrupt in months.  An alternative to this is to invest in an index fund, which represents a broad segment of the market, rather than just one company.

Investing isn’t for everyone.  In fact, it’s not even necessary in some cases.  If your finances are in order, and you have money to play around with, go ahead and see what the hype is about.  If you’re struggling to pay rent, then now is not the time to begin investing.  Feel it out, see what fits your current situation, and above all, be wise with your money.

About the author: Kirstin Le Grice is a recent graduate of University of Colorado and a staff writer for CollegeFocus, a website dedicated to helping students deal with the challenges of college, including housing, finance, style, health, relationships, and transferring from a community college to a four-year university.

You can follow CollegeFocus on Twitter at @CollegeFocus101 and Facebook at www.fb.com/collegefocus.

Editor’s Note: I think these are great tips for beginner investors.  My suggestion for those that are unsure is to learn about how the stock market works.  If you don’t have a lot of money to invest, then check out Betterment.  I use them and they are a great service.

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Leave a Comment:

26 comments
Matt Becker says July 18

“Don’t invest in a company because you work there, or because someone you know works there. It may be your favorite place to shop, but you don’t know anything about their finances”.

I love this quote. This to me is a great argument against Peter Lynch’s popularized notion of investing in what you know, which seems to me like a great way to make stock picking sound easy but also get people in trouble really fast. The fact that you love a company doesn’t make it great investment.

Reply
    Edward Antrobus says July 18

    And yet, most companies’ 401(k) plans default to company stock.

    That said, I’m not sure this argument applies to the company you work for. Who is going to know better how a company is doing than the employees?

    Reply
      Grayson says July 28

      You would be surprised on how many employees have no idea how well the company is doing. I see this all of the time and it drives me crazy.

      Reply
    Marissa @ Thirtysixmonths says July 19

    I also really like this quote. People get too sucked into the love of their workplace and lose a ton of money.

    Reply
    Terrence Forest says July 20

    You’re right cause some businesses may apear to be doing really well but could be in absolute financial turmoil behind closed doors. This why as an investor its very important to throughly research any business or invest you’re considering putting your money into. I wrote a post about the pros and cons of investing in stocks Make Work for You

    Reply
      Grayson says July 28

      You are correct Terrence. Many people have no idea what is happening behind closed doors. They see the paycheck and think the financials are good to go.

      Reply
    Grayson says July 28

    I have the option to get company stock, but that is because we just went public. I do plan on purchasing them and then probably selling them later so I can invest it somewhere else.

    Reply
DC @ Young Adult Money says July 18

Once I have a larger amount to allocate towards investing I plan on buying some individual stocks. Researching companies, their strategy, and the direction they are headed is something I enjoy and I definitely look forward to doing more of it in the future.

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    Grayson says July 28

    Good luck to you DC. The research is an important part of the investment process.

    Reply
John S @ Frugal Rules says July 18

Nice overview. Like I’ve written about before, investing can be very simple if you handle it the right way. My general suggestion is that for those just starting out is to focus on things like index funds to keep it as simplistic as possible.

Reply
    Grayson says July 28

    I agree with you John. I made it much harder than it had to be when I didn’t know much, but know that I have more investment knowledge, I see the ease.

    Reply
Sam Gill @ Digital Spikes says July 18

Agree on long term strategy. It is same as real estate if you invest in property you don’t check prices every other day, Same goes for stocks, invest for long term

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    Grayson says July 28

    Investing for the long term is the only way to go for most people.

    Reply
Kurt @ Money Counselor says July 18

Equities have their place, but I’d encourage people to investigate other options. Stocks are riskier than you probably think, and the fees associated with stock investing can cripple a nest egg’s growth. The notion that achieving a secure retirement can’t be done without turning the lion’s share of your savings over to Wall Street is nothing more than marketing bunkum! Just my 2 cents. 🙂

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    Grayson says July 28

    I agree and I think that diversification is the key to success with anything regarding money. The hard thing for most is getting the education to go beyond the stock market.

    Reply
Sean @ One Smart Dollar says July 18

Really good overview. I am a big fan of stocks, while they do have risks you can make a nice amount of money if you are diversified.

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Andrew@LivingRichCheaply says July 18

I’m a big fan of index funds for the diversification and low fees. But I can’t help myself, and have a small portion of my portfolio in individual stocks. I haven’t really done too well with my stock picks but I keep trying to hit that homerun.

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    Grayson says July 28

    There is nothing wrong with individual stocks, but you have to do the research. I plan on doing some work with dividend paying stocks soon enough.

    Reply
Pauline @ Make Money Your Way says July 18

You do have to be in for the long term. It is easy to get carried away and invest too much to find out you need the money a year later, when stocks are down.

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    Grayson says July 28

    People see that they “could’ make quick money with the stock market, but that is extremely rare and they should be in it for the long haul.

    Reply
Derek | MoneyAhoy.com - Money Saving, Making Money, and Investment Ideas says July 22

For most people, investing in market index funds is best.

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Sharri says September 17

thanks Marla! what a lovely compliment!

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Brian Linnekens says April 16

This guide is great if you’re new to the investing world, or the business realm in general. It will adequately introduce you to the essentials of investment as well as the key terminology.

Reply
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