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.
- 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.
- 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.
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.
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.
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.