Your debt is finally paid off, you have 6 months’ of income set aside in an emergency savings fund, and you are ready to tackle the next stage of financial freedom. In order to begin truly building wealth for your family, you know you need to begin investing your money so that it works for you, but you have no idea where to start and which investments to make. Investing as a beginner doesn’t have to be intimidating, stressful, or risky. Instead, just follow these five easy investing tips for beginners and let 2018 be the year you watched your family’s net worth begin to grow:
Beginner’s Tip No. 1: Diversify your Investments
If you have $1000 to invest right now, and you invest the entire amount in a single stock that you have a good feeling about, you risk losing your entire investment in one fell swoop. A much savvier approach is to diversify from the very beginning by investing in a “basket” of investments in the form of a mutual fund or an exchange-traded fund (ETF). Check out Ally for free trades when you open an account.
Beginner’s Tip No. 2: Build Investment Literacy
What is investing anyway? As a beginner investor, you might not have the knowledge base to make the best investments possible. But that’s to be expected, so don’t be afraid to ask questions. Before you make your first investment, it’s a good idea to spend some time building financial and investment literacy. Look into getting a guide to investing. Load up your Amazon cart with a few of the best investing for beginners books, subscribe to personal finance blogs and podcasts, play around with small microinvestments and generally aim to build up your understanding of how investing works. This will help you gain confidence and the ability to make sound investment decisions.
Beginner’s Tip No. 3: Consider a Financial Advisor
Once you know what you’re doing, you can save more money by taking a DIY approach to your investments, especially if you discover that you truly enjoy learning about the stock market. For the time being, however, it may make more sense to consult a professional financial adviser to help formulate a long-term investment plan, create your first investment account (especially if you don’t already have a 401K or IRA in place through your employer), and decide where to invest your money. A qualified advisor such as Personal Capital has the expertise to provide actionable stock market advice for beginners. They’ll maximize your growth potential while minimizing your long-term risk for a win-win scenario.
Beginner’s Tip No. 4: Investing Is About Long-Term Goals
One of the scariest things about making investments for beginners is the volatility of the stock market. When you see your funds temporarily go down, you may be tempted to pull your money and keep it in a no-risk savings account. On the flip side, some new investors get giddy when they earn money in the market and withdraw their investments to buy something expensive and exciting, like a new car.
Keep in mind that the point of investing is long-term financial freedom. Your investments will fluctuate in the short-term, but due to the nature of the stock market as well as the beauty of compounding interest, you will build wealth over time. Take a patient, long-term view and keep goals like early retirement and paying for your children’s college in mind at all times.
Another way to invest that will provide you with longer term financial freedom is to invest into certain areas of your company. Using local commercial builders to create commercial premises for you may seem costly at the time, for example, but in the long run, if you know your business is staying put location-wise, you can save yourself a fortune in commercial rent payments.
Beginner’s Tip No. 5: The Value of Dollar Cost Averaging
Dollar cost averaging is a simple but effective approach to investing. The basic idea is that each month you invest the exact same amount of money (raising this amount over time as your income increases), regardless of what the stock market is doing. Let’s say you decide to invest $250 per month. Some months that amount will get you only a few shares in your investment fund, while other times when stocks are down you will get quite a few more. Over time, however, this averages out, you accumulate more shares, and you get to benefit from compound interest.
Getting Started: Investing With Little Money
Everyone has to start somewhere, so don’t let limited funds hold you back as a new investor. First, create a budget for the next 3-6 months that allows you to put money aside to seed your investment account. Set a defined, realistic goal amount that you’re aiming for – reminding yourself of that number will help keep you on track when you’re tempted to make a purchase that’s not on your plan. (And you will be tempted!) If possible, set up an automatic transfer of that money from your paycheck to your saving account. If you don’t see it, you’ll be less likely to spend it.
As your savings grow, this is the ideal time to start learning about investing. As mentioned in Tip No. 2, start reading books, paying attention to stocks you might be interested in and get a feel for market fluctuation and investing strategies. When you reach your goal amount, you’ll already have done your homework and you’ll be excited to start investing and put all your newfound knowledge to work.
The most important thing to remember about trading, focusing on short-term goals, and investing, focusing on long-range goals, is that you learn about the system and what to do.
Although this might seem a rather obvious piece of advice, it’s rarely followed. You may be surprised to learn that many traders treat each stock, security and bond market as if they were the same environment, failing to appreciate the differences, and, worse still, getting into all sorts of investments without at least knowing a few things about the process.
Understand the Trading Environment
National Association of Securities Dealer Automated Quotation (NASDAQ), for example, is a trading environment. It is the second-largest stock exchange in the world, after the New York Stock Exchange (NYSE) in terms of market capitalization. Although they are located in the same city, NASDAQ is a different environment then NYSE. They have different trading principles. The NYSE is an auction market, NASDAQ is a dealer’s market. So some useful things to know about NASDAQ if you are trading in it are basics like opening and closing times, NASDAQ holidays, and, of course, the rules and regulations.
What to Do in the Stock Market
When studying investing basics, here are a few things that you should factor into your trading plan:
Avoid over-optimism
It may have taken you some time for you to create enough money to fund your trading account, perhaps years of frugal living and painstaking savings. However, it’s only too easy to get a little too thrilled at the opportunities to double or triple your money. Instead of putting all your money on what you consider are some winning trades, exercise caution, focusing only on what you can afford to lose rather than what you can hope to gain.
While optimism is generally a good thing in life, in the stock market, it can land you into trouble, tempting you to over invest. Sometimes winning trades are what they seem; at other times, they are mirages. You don’t know enough about them in the moment. While there may be some pain in not riding a winning trade all the way up with your resources, the pain of making a mistake and having your total account wiped out is even worse.
If you don’t maximize the benefits of a winning trade, then there are still other others just around the corner. However, if the market turns against you quickly and wipes out your account, then you are out of the stock market game completely.
Another way you can avoid becoming a victim of your optimism is by putting in a stop loss. It is better to exit with a stop on a losing trade than it is to ignore a stop loss on a winning trade.
Stick to the Facts
The more highly intelligent you are, the more possibilities you can see because you are a visionary. In chess, for example, an amateur player will see only five candidate moves in a given position while a master chess player will see an additional five candidate options. Similarly, in the stock market, you can get highly creative when developing your trading methodology.
However, many scammers prey on imaginative people, promising quicker, faster ways of making money. Some scams, for example, are quite convincing, telling you in breathless detail about the enormous search potentiality of their software to seek out winning trades. Be wary of stock market scams.
Avoid anything that is not a solid trading methodology. Make the effort to slowly and carefully study the facts about trading. The trading methodology that you eventually arrive at should be based on researched information and experience rather than magical thinking. Theoretically, it is possible that there is an analytical system or software that far exceeds a slow and deliberate approach, but it is also more likely that someone is merely selling you the spades you need to dig for gold because it is far more profitable than if they did the gold-digging themselves.
It’s fun to be in the stock market. It’s is an exciting way to make extra money or earn a living. If you’re really good at it, you could make as much money in a month with little effort than you would if you worked hard for a whole year at a regular job. However, the reason why everybody isn’t doing it instead of commuting to the job they hate is that it takes considerable time, study, and practice to be that good. So, if you’re serious about the stock market, you have to take it seriously, working at it with the same diligence as someone studying for a law degree.
How to Invest Money for Beginners
Just get to it! As you can see from these tips, building long-term wealth doesn’t have to be difficult. Get started today!