Investing is wide open because there are many ways to use the money to make more money. You can do something as simple and conservative as opening a savings account. Or you can buy bonds or a CD
Buying stocks is an excellent way to grow money over the long term, and you can take advantage of plenty of stock and index funds out there.
Day traders engage in the more risky business of buying and selling stocks daily, sometimes the same stock on the same day. But most day traders tend to lose money.
Another alternative is to get into the options market. That’s when you pay to enter into a contract with the option to buy or sell shares of a stock at a specific price or before a specific date.
The options market isn’t exactly for beginning investors because complicated calculations and speculation are involved. But options can be a tool for hedging risk.
Building a Portfolio
It would be best if you based investment portfolios on specific goals. After all, you need to know why you are investing your money, other than just “getting rich.” So, identify what you need in a few months or further down life’s road.
Let’s say you want to take a big overseas vacation within the next couple of years. You could use a high-yield savings account, certificate of deposit (CD), or a short-term bond.
You are trying to set aside money you know will be there while keeping up with – or beating – inflation. And since these are investments with guaranteed interest, you know you will have that money at hand when the time comes.
What if you are young and saving for retirement or a college education for your kids? These are considered long-term investments suited more for stocks or mutual funds.
Stocks are proven winners over the long term, so having a diversified stock portfolio is an excellent investment for ten years or more.
If the business you work for offers a 401K plan, take advantage of it and regularly contribute as much money as you can afford. A 401K savings plan is as diversified as any mutual fund.
A home is an investment within itself. If your goal is to buy a house or renovate the one you own within the next ten years, then a mixture of stocks and bonds is a good choice.
There you have growth and certainty built in. Mutual funds that mix stocks and bonds are perfect mid-term investments.
Selecting The Right Stock
Picking the right stock is the tricky part of investing. No matter how good a company’s track record is, there is no guarantee of what tomorrow will bring, So be prepared to do a lot of research.
Look into earnings per share (EPS), price-to-earnings ratios, who runs the company, how the competition measures up, the company balance sheet, and other key factors.
A good stock analysis applies doubly to stock options investors because of the time and price specifications involved. You should only buy an option at the right time if you do your homework.
You will have to know everything from reading stock option symbols to using tactics like vertical spreads. That’s another reason that options are not for investors who are just starting out.
What Leverage to Use?
Leveraging is not for beginners or even average investors. It is a big thing among professional traders. You can trade on margin by borrowing money to invest because you want to buy more than you can afford.
Or you can buy at a discount by increasing the number of shares in a trade through options.
Options trading is a form of leveraging because you buy large chunks of shares at a price far less than the actual cost of individual shares.
Most of us dip into savings to invest elsewhere. But no matter where the money to invest comes from, you must calculate interest and commissions.
Begin Buying Indexes
Index funds are a way to diversify because they track indexes such as the S&P 500, Dow Jones Industrial Average, or Nasdaq. Since indexes represent large groups of stocks, you can purchase shares of an index fund, and the diversification is built in.
There are a variety of funds that represent large companies, small companies, foreign companies, or even bonds.
There are also exchange-traded funds (ETFs) that track indexes or various sectors of the market. Options traders sometimes buy into indexes to cut risk.
Avoid Day Trading
Day trading is the high-end, heart-pounding practice of buying and selling stocks daily. Day traders will sometimes purchase shares of a company at a lower price, track it for minutes, and dump it at a higher price.
That profit is how day traders make money. But day traders have to figure in the expense of taxes and fees involved with the frequent trades. And that’s not to mention being able to predict the movement of stocks consistently.
Day traders need to have an advanced knowledge of the market to employ various strategies and conduct detailed market analyses. They also operate with large amounts of money that require leverage. That’s why most day traders work for big financial institutions and hedge funds.
So, day trading is much too involved for most investors. Most people who try day trading on their own will lose money.
Test Investing Simulators First
Simulators are great tools for beginning investors. You can play around with the market, literally. There are investment simulators that provide you with an account of play money and allow you to buy and sell.
We say play, but there is a serious reason for using an investment simulator. It will give you an idea of how stock values change on the market and how real dollars might fare.
It will also allow you to test your investing skills and see how you would react to gains and losses.
Small Investments Over Time
Investing is a process. You build wealth over time unless you inherit a bunch of money or win the lottery. This is why 401K plans are good to contribute to through your workplace.
ou have built-in diversity and continually add value by putting more money into your account.
If you don’t have a 401K, you can gradually purchase stocks, bonds, and other securities to build wealth. You will need to set goals and use enough discipline to stick to a plan of consistent investing.
Basic Risk Management
Investing carries risk, but you can reduce that risk by investing your money in the right places. You want to put only some of your eggs in one basket, so diversification is the best rule for avoiding risk.
Buy stocks in various sectors, chip in with bonds or CDs, or have a mutual fund. And make sure to factor in trading fees and capital gains taxes when you cash out.
You can see that investing is open to a wide variety of choices, from simple savings to the wild world of day trading and options trading. No matter your financial situation, there is an investment strategy for you. It’s just about setting goals, minimizing risk, and using discipline.
If you start setting aside money and choosing the right investments, you can build for the future.