What should I look out for before investing my money into stocks or other financial instruments?
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The stock market has always fascinated investors. Whether they want to invest their savings for retirement or simply earn some extra income, the stock market offers them a variety of options.
There are four basic principles that every investor should follow before entering the stock market. It’s important to keep in mind and include diversification, risk management, value investing and time horizon.
What is investing?
Investing is buying securities like stocks and bonds. You buy shares of companies you believe will do well financially. When those companies perform well, you make money. When they don’t, you lose money.
Buying individual shares can be is time consuming and involves lots of research because you’re looking for the best price, the lowest risk, and the most promising future performance. For example, you might want to invest in a company that makes computers or cell phones. If you bought only their shares and their stock declined, it could take out a large part of your portfolio. At the same time, you may decide the risk is worth it depending on your research and risk tolerance.
Other types of investments include share-based ETFs . They pool together investments into groups called an ETF which act like a basket of stocks or a collective investment. These baskets are based on specific criteria, such as industry sectors, geographic regions, or even types of securities. Then, the fund managers look for the best opportunities within each basket.
Collective/pooled investment funds use professional management to help choose what to invest in. Funds typically charge fees to investors. But these fees are much lower than those charged by actively managed mutual funds.
Stocks are typically traded on what’s known as a stock exchange. Some of the most popular include The New York Stock Exchange (NYSE), NASDAQ, AMEX London Stock Exchange, etc.
What do you want from an investment?
The overall goal of investing is to make money right? So what is the best way to go about doing that?
Well it really depends on what you are wanting from your investments. As mentioned in the last section, if you take more risk you could lost a large part of your investment portfolio however this may pay off and cause you to be extremely wealthy.
You may on the other hand not want to be crazy wealthy today but you want to retire wealthy and maybe early. In that case a slower approach may be more suitable where you look for stable and consistent returns over the long term. Somewhere around maybe 5–10% per year.
What are shares?
Shares are a form of ownership of a company. They’re similar to owning a piece of real estate because you own part of the building. You can sell it or rent it out, just like you could do with a house. But unlike houses, shares give you voting rights and control over how much money the company makes.
Some stocks pay out dividends which are essentially your cut of the companies profits. Companies early in growth may not pay out dividends as they are still using the money to grow the business.
Your dividends are usually paid out as a percentage of the share price. For example, stock X may have a £100 stock price and a 3% dividend. This means the stock would be paying out £3 per year. This payment may be split across the year. Usually quarterly. So for the example above you would get £0.75 every 3 months.
1. Have a Plan For Your Investments
The first thing you need to do when starting any new venture is to have a plan. What are you going to do with your money? How much will you spend? What is your investment strategy?
Personally, I am a long term investor. I purchase stock for the long term every month whenever I have money. I don’t necessarily care about the day-to-day price of what I’m purchasing as I feel my investments are going to be worth a lot more in 10+ years.
This type of strategy doesn’t work for everyone however. Many people also prefer other strategies including day trading/swing trading and within those categories are many specific categories for those time horizons.
If you don’t go into the markets with a plan then it means you are essentially gambling. You may get lucky, but I wouldn’t count on it.
2. Time In The Market Beats Timing The Market
The term‘Time In The Market Beats Timing The Market’ has grown to be quite popular. The quote means that typically, it’s a lot easier to just stay in the market or companies you like long term versus trying to trade the markets.
That’s not to say trading can’t be done. But if you are wanting to day trade any type of asset, you need to know that it is more of a full time job. Many YouTubers and influencers try to make it sound super quick, 5 minutes and out. But the truth is that it takes a lot of practice and a lot of people will lose money trading.
Long term investing at least from my personal experience as been a lot “easier”. I still have to research the companies I am interested in and stay up to date on things but as my time horizon is so long, I don’t have to worry about perfect execution in the short term.
I find the companies I like… I purchase their stock… and then wait (or maybe buy more stock).
3. Invest in What You Know
Investing in what you know is one of the best ways to invest. If you are an expert in something, why not use that expertise to see which business are improving your industry or are really growing nicely.
If you have the experience or even the interest in the business then you will have a much easier time researching the company compared to if you were to begin investing in companies you don’t like or have an interest for.
You may also have a natural advantage from having a deeper understanding of the certain industries your business is in.
4. Diversify Your Portfolio
For many investors that don’t want to take too much risk, having a range of assets is a great way to reduce risk and diversify your portfolio.
In this scenario, if one of the business’ your invested in goes bust or drops in value it will be a much smaller part of your wide range of investments. This works in the opposite way where if one of your investments does exceptionally well, it won’t massively increase your overall portfolio.
It’s up to you to decide on your risk tolerance but know that being diversified makes it much less likely you will lose all of your money.
Summary
As a new investor, you may feel overwhelmed by all the information out there. That’s why I’m sharing my top four investment principles as a beginner. They can help guide your decisions when you start investing.
These principles aren’t set in stone; they’re simply some guidelines to help you navigate the world of investing which I try to adhere to. Ultimately, you’ll need to decide which ones work best for you.
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Comments
Great stuff