Most people started to realize that just letting their cash sit in a bank account is not the best strategy of handling their money, and a smart investment strategy that takes advantage of good economy and bull markets can have a great rate of returns. The problem is, however, there is a certain risk included in investing, and if you don’t know the basics, there’s quite a good chance you’ll lose some money when you start. This article helps you grasp the basics of investing to help you start the journey of using your money more effectively.
How to Start Investing
The investment world is vast and complex, and many financial institutions have a direct incentive to obfuscate information and terms to prevent competition, and that’s why most laypeople will have a difficult time starting.
Unless you have a background in finance or economics, you aren’t qualified to immediately start investing, and you’d be just wasting your money blindly picking companies hoping to hit a profitable company. But all is not lost, most laypeople can start investing their money after reading a book or two on the subject and internalizing the major rules that every investor should know:
- Make sure you start small: it is inevitable that you’ll make a few mistakes, in the beginning, trying to grasp all the concepts and getting into the mindset of investing, and it is paramount you protect yourself from rookie mistakes by investing small. For the first three months, invest a substantial but noncrucial amount of money in businesses and track your progress, and if you see that you’ve kept most of your money and have even made a profit, then it is safe to progressively increase the amount of money you have invested in stocks.
- Don’t Panic: panicking will only make you emotional and hamper your decision-making skills - the worst investment decisions have historically been made when people have started panicking. If you believe in the company you’ve invested in, short of depression, you don’t need to worry about the daily fluctuations of the market. You need to keep a cool, level head and look at the facts from a distance.
- Never invest all of your money in stocks: stocks are volatile by nature, and while there is great potential for profits, there is also an alleviated risk of losing money. That’s why you should have about 50% percent of your wealth in the stock market at most, and the rest can be invested in long-term government bonds or retirement plans, etc. These are great ways to have some baseline wealth saved and growing over the inflation rate for a rainy day or unpredictable change in the stock market.
Do Your Research on the Businesses You want to Invest In
It isn’t enough to just look at the stock market data, financial statements, etc. of a company before deciding to invest in it. Most seasoned investors advise is to know whether you’re ready to invest in a company or not, you should ask yourself if you’re ready to buy it. Because the fact is when you invest money in a company, you are essentially buying a part of the company, and your profits and success depend on the company’s profits and successes.
Dig deep into the company, its upper management, work ethic, and mission statement. Learn about the way the company runs, their profit margins, and their future plans - most companies traded publicly, put most of this information out, so you’ll be able to easily access it. This might sound like too much trouble, but it is the only way to guard yourself against market fluctuations and the whim of the market. You’ll know the stock you have is valuable and the company will make a profit, so even if the stock’s price goes down, you’ll know you’ll have nothing to worry about.
The Profits Will Almost Always be Directly Proportional to the Risks
You have to understand something about the stock market - it is not a place to get rich quick - almost nobody gets rich quickly off the stock market, and the ones that do get rich Like Warren Buffett and George Soros it took them decades of experience to get where they are. There is one rule that almost always holds the truth for the stock market and life in general: the amount of risk is directly proportional to the amount of profit you might make.
For example, investing in one of the Fortune 500 companies isn’t risky at all - you should expect a steady rate of return, but on the other hand, you also shouldn’t expect to make a ROI of more than 10% a year - it just doesn’t happen with those big companies. On the other hand, if you’ve been following a startup through various news sites and specialized channels like VNX.io (which offers detailed information about startups for venture capitalists), and you have faith in them, then investing in the company when they first make their IPO (initial public offering) means you have a real chance of investing in a company that might grow ten to one hundred folds over a few years. The downside to this is that the investment is way riskier. Being good in the stock market is all about balancing risks with rewards, and you should find a strategy that works for you.