Welcome to this “How to start investing” guide for beginners. Congratulations, your decision to learn about investing is the first step to financial freedom, as investing is one of the most reliable ways to build wealth over time. The goal of investing is to make your money work for you. The key to building wealth is compound interest, it makes your account balance grow like a snowball over time, even if you start small. Anyone can do it, it’s not rocket science.
In this guide, you’ll learn why people invest, how to define your personal financial goals, how to choose appropriate investment vehicles, how to grow your investments, and more. The goal is to build financial literacy and give you a basic understanding of investing to help you make informed investment decisions. Investing is a marathon, not a sprint. Investing only small amounts can make a huge difference over time. So let’s get started!
- What is investing?
- Why do people invest?
- Before you start investing
- Setting your financial goals
- Types of investments
- Introducing your financial team
- Investment tax and regulations
- Making your first investment
- Monitoring your investments
- Scaling your investments
- Ready? Let’s make your first investment
What is investing?
Whenever a person commits capital or its equivalent with an expectation that the outcome will produce greater value than the input, they have invested. Typically investing involves using money to purchase an asset that will generate gains or the purchase of services, or intermediary items, that enable investing.
“Investing is the strategic purchase or sale of assets in order to produce income or capital gains.”– Merriam Webster
In everyday life, people talk about investing in either themselves or others, typically with the expectation that the returns on that investment will occur sometime in the future. Oftentimes people use the word investment to mean both the initial spend on the asset or the asset itself that will generate the future gains. Investing involves four components:
- Investor: The person who provides the initial capital, asset, or similar to purchase the asset which will generate the future gains.
- Initial input: Whether money or trade is used, the initial input (sometimes referred to as the investment) purchases the asset or service that will generate future gains.
- Asset or service (investment): Regardless of whether a person purchases an asset (e.g. house, stocks, gold) or a service (education), the investment is expected to provide gains for the investor.
- Gains: The expected income or value that exceeds the initial input.
Investments can be undertaken by groups or by individuals. Companies can invest in equipment upgrades to make their production more efficient to lower production costs in the future. Individuals can invest in an education now, with the expectation that they will be compensated with higher salaries in the future.
While most people think of investing typically in terms of buying stocks or other assets, it is important to remember that there are a wide variety of options that are often overlooked. Simple things such as adding insulation to one’s home to lower utility bills can sometimes provide a better return than most other investments.
Regardless of which type of investment you make, from stocks to bonds, real estate to small businesses, investments can always be evaluated in the same manner. When the probability of expected future gains is outweighed by the stronger likelihood of losses, you are gambling instead of investing. Investments don’t always work out. Nevertheless, the likelihood that they do work out, and the value of those gains, should outweigh the opposite situation.
Why do people invest?
People invest to make profits that exceed their initial investment. As mentioned previously, while this typically takes the form of money, it can also include other assets and services. All investments are predicated on having a goal. Goals range from specific items to pay for to general wealth creation. Because investing is simply an adjunct to general pay, one can think of it as a way to put additional funds towards anything that a paycheck or savings would normally be put towards.
Investing does not only have to be for your own benefit. Rather, investing simply requires that someone benefit from the process. Conventionally, this is seen with relatives investing for the purposes of passing wealth along to their family. Below discusses a handful of common reasons that people invest throughout their lives.
- Retirement: The most common reason people invest is to secure their retirement. While many governments created retirement backstops, such as social security, they provide marginal amounts, and their future solvency remains questionable. As such, many people set aside money through their regular paychecks as part of these governmental systems, as well as through pensions, tax-deferred accounts such as 401Ks, pre-taxed accounts such as IRAs, as well as many others.
- Life events: Personal life events from weddings and graduations to religious ceremonies, even funerals can be quite expensive. While less common than retirement, people often choose to set aside funds for life events, normally in low risk accounts that keep at or slightly outpace inflation.
- Personal development: As common as it may have been to receive a check from a relative for a birthday towards college, these types of funds provide common sources of investment for education and development. Even state sponsored accounts that allow for prepaid education involve forms of investments. Investment in education is associated with the expectation that beneficiaries will earn higher salaries or succeed in their future careers.
- Housing: While the global financial crisis painted a different picture, housing typically constituted one of the largest investments for most families in the 20th century. Purchasing a home can be seen as both an investment and a savings, as one can achieve both capital appreciation on the property and make lower monthly payments compared to renting.
- Avoid inflation: Though not as well thought of, people often invest in low yield accounts to avoid keeping their excess funds in cash. Depending upon interest rates of the prevailing currency, holding cash can actually decrease one’s wealth over time.
- Wealth creation: Many people associate investing with wealth creation. While the goals here are not necessarily specific, the general goals are to use excess funds to earn higher returns than they otherwise would if they had not been invested.
- Provide for others: Whether people are investing for themselves, their family or future generations, excess wealth is often passed on to relatives. In some cases, exceptionally wealthy individuals invest to generate funds for charity and research that benefit society as a whole.
These are the most common reasons why people invest. In general, different people invest at different times of their lives for different reasons. In the next section of this guide on how to start investing, you will learn more about the necessary preparations before you can start investing.
Before you start investing
The decision-making process to make a particular investment can take a few days, months, years or even decades. Regardless of the time frame, investing requires preparation. Making an investment requires a self-assessment, followed by an evaluation of the elements needed to create an investment plan.
Self-evaluation before you start investing
Before you start investing, take an inventory of where you are financially and what stage of life you are in. Here are a few important points to consider:
- Current stage in life: Younger people tend to have a longer time horizon than older people when investing for retirement or general wealth because they have more time to invest and compound interest. Additionally, older individuals typically need more stability in their principal balance and cash flows, whereas younger people may be able to handle more volatility that can be smoothed out over time.
- Debt to income: Total debt expenditure in relation to income flows is an important indicator for investments. The time it takes for an investment to mature means that capital is tied up and is no longer available for debt service. Understanding the impact of not having these funds liquid helps investors determine their margin of safety when servicing their debt. Banks use the debt-to-income ratio when applying for a home loan to determine the likelihood that you will be able to service the debt.
- Personal preferences: Investing is as individual as a person. Consequently, investors need to understand the following preferences and tolerances:
- Active vs. passive investing – How much effort & time for research and analysis.
- General aptitude for investing – Personal skills to analyze investments.
- Risk tolerance – Extent of volatility that an investor will tolerate.
Investment plan preparation
Preparing for an investment is not much different than any preparation for a project or event. Several important components on how to start investing form the basis in almost every case.
- Inventory assessment: Account for all of your financial assets and liabilities, as well as your net worth, to determine the total amount of funds you can invest.
- Emergency fund: Sometimes life delivers unexpected events. Emergency funds absorb the shock of unexpected payments from circumstances such as car repairs or medical payments. Buying insurance with higher coverage and lower deductibles can reduce the amount of emergency funds that need to be set aside.
- Set financial goals: This topic is covered in other sections of this guide, but financial goals drive the entire investment process. Once you know where you want to go, set the parameters for how to start investing.
- Credit score: If the investment involves taking out a loan, your credit score may determine the amount of the loan and the interest rate you are charged.
- Spending flows: Knowing your income sources and expenses allows investors to evaluate the stability and longevity of these streams. Bonus payments may not be consistent, but deciding what to do with them when they occur should be part of an investment plan.
- Total risk: One of the most important aspects of investing is understanding the overall risk of an investment. Investing should be something that you are confident will not lead to ruin if a worst-case scenario occurs. Making investments that are higher risk than can be planned for or tolerated can lead to shortfalls in paying debts and basic living expenses, or force an early liquidation of an investment.
If you are in a position to invest, you must first be clear about your personal financial goals. That’s what we’ll focus on in the next section of this how to start investing guide.
Setting your financial goals
Probably the most important part of investing is setting your financial goals. Understanding the specifics of your goals both in terms of length of time, the amount you want to save, and why define how you will save and invest. A goal of wanting to retire at age 60 is not sufficient as a basis for planning, as you need to know how much you will need to have at that time in order to retire. Therefore, there are a few key components to setting financial goals that can be defined by the net present value formula:
- Initial investment: Regardless of the initial amount, the first dollars invested in an investment form the foundation of the investment. The larger the initial amount, the less is needed of the other components to reach the final goal. Since the initial capital starts the entire investment, it has the most time to compound and earn profits of all the deposits into the investment.
- Time-frame (number of periods): Knowing how long to invest, how often to invest, and how long the investment will last is an important input to your financial goals and plans. The longer an investment grows, the more you add to the investment sooner, the more profit it can make, even with only small amounts of interest.
- Additional payments: In addition to the initial principal, additional payments (often referred to as annuity payments when made annually) provide additional capital that is deployed over the life of an investment. The size, frequency, and timing of these payments can dramatically affect overall profits.
- Rate of return (interest rate): Investments usually offer gains in the form of their interest rate. The interest rate simply means taking the amount of profit and dividing it by the original amount invested. This gives you an idea of how much you are earning relative to the original outlay. Compounding applies the interest rate to the updated balance at the end of each period. Higher interest rates are usually associated with higher risk, such as stocks versus bonds. When investments have more time to mature, they can more easily absorb fluctuations associated with riskier investments. With shorter time periods, investments do not have enough time to even out the ups and downs.
- Ending value (future value): The final amount of money needed from the investment defines the investment more than any other component in goal setting. If a person needs $500,000 to live on at age 65, any investment must reach that amount through a combination of initial investment, return, or additional payments.
Changes in each of these components have a direct impact on the others. For example, if you achieve a higher interest rate, you may not have to start with as much principal or make as large an additional payment. This may sound daunting, but you are not alone. There is a lot of content on this topic available online and there are people willing to help you. If you have any questions, please feel free to leave a comment with your questions below.
Types of investments
After reading the first part of this guide on “How to start investing”, you may already be wondering where to invest your money. Well, there are many types of investments available, also called asset classes or investment vehicles. Below are the most common types of investments and their definitions:
- Stocks: Stocks are partial ownership in a company, which may be public or private. Investors own part of the company in proportion to their share of the total outstanding shares.
- Bonds: One of the oldest financial instruments in the world, bonds represent a contract for debt between a company and an investor. Bonds are contractual obligations on the part of the borrower to repay the debt at a specified time and at all other points during the life of the investment that have been agreed upon. Bondholders come first when companies file for bankruptcy and can be repaid by liquidating assets a company owns.
- Currencies: Currencies provide a medium for storing value in a particular country, allowing people to trade between dissimilar goods and services. Each country maintains its own currency, which has its own supply and demand and is backed by the government. The interconnectedness of countries in their economies from trade to war can affect the demand and value of a particular currency.
- Cryptocurrencies: Cryptocurrencies are unregulated mediums of exchange in a decentralized (no central controlling authority) electronic ledger that have a regular known method of supply. These coins and their derivatives can be assigned a value and can be traded on open exchanges. Unlike currencies, the value of cryptocurrencies depends entirely on market participants and is not backed by governments.
- Derivatives: Derivative products are contracts whose values are derived from a secondary asset. These products include options, contracts for difference (CFDs), futures as well as others.
- Real estate: Probably the best known asset class, real estate is investment in real property or land. These investments can be in the form of residential, commercial or industrial uses, depending on zoning and permitting.
- Hard assets: Also known as tangible assets, hard assets include all physical items that can be bought and sold for a profit. These include collectibles, watches, paintings, antiques and others.
- Businesses: If you have ever started your own business, you have invested. Investing in a business (outside of stock exchanges) is simply about providing money, goods or services to a company to generate future profits.
- Commodities: Commodities or raw materials are intermediate products in a manufacturing or business process that are then converted into a product for use or sale. Metals such as iron and silver, fuels such as oil and gas, industrial products such as wood and resin all fall into the category of raw materials.
- Futures: Similar to options contracts, futures contracts provide a contract to buy or sell an underlying asset at a specified price. Unlike options contracts, which grant the right to do so, futures contracts require an obligation to execute the transaction.
- Mutual funds / ETFs: Mutual funds are pools of money managed by an assigned group of individuals or managers using a specific strategy. While mutual funds are only available at the end of each day, exchange-traded funds (ETFs) are traded like stocks over a trading session.
- Retirement accounts: The most common and well-known investment accounts are retirement accounts, which include 401K, IRA, pensions as well as others. These accounts are specifically designed to help individuals or groups invest and save for retirement.
- Statistical & skilled betting: Unlike gambling, which is defined by putting money towards a transaction that has negative expected value, statistical and skilled betting makes use of statistics and / or skills in order to create an edge and positive expected value from transactions.
- Bank products: Banking products range from low interest checking and savings accounts, to certificates of deposits, as well as a wide variety of other instruments. At an institutional level, banks may offer customized investment products.
These are the most common types of investments, but there are many other investment opportunities out there. Next in this guide on how to start investing, we’ll have a closer look at who can assist with your investments.
Introducing your financial team
Once you’ve decided to start investing, you have two options at your fingertips. You can either build financial knowledge, learn about investing, and become a DIY investor to make your own independent investment decisions. Or you can rely on the financial expertise of experts in the financial industry to help you invest.
The breadth of the investment landscape can be quite daunting. Whether it’s real estate, stocks, bonds, venture capital or other instruments, people regularly rely on financial advisors to help them navigate the markets. Financial advisors come in many forms. Most fall into a few select categories where it’s worth understanding what they offer and how they deliver their services.
- Fiduciary: Although the term is not used everywhere in the world, fiduciaries have compensation structures and obligations (sometimes legal) to provide products or services that are in the best interest of the customer. Those who do not have this designation are not obligated to work in the client’s best interest and may push products that earn the salesperson or agent better commissions.
- Financial advisor: The term “financial advisor” is used quite liberally around the world. Like the term bureaucrat for any government employee, financial advisors simply provide a service to a person or group involved in finances. These services range from insurance products to stock selection to estate planning. As mentioned above, the selection of a financial advisor should only be made with knowledge of their compensation structure and obligations to their clients.
- Financial planner: Financial planners generally work to create an overall money management plan for their clients. While most work in the area of insurance products, many also offer money management, retirement and asset building advice.
- Accountant: While they may not seem like consultants, accountants are actually one of the most common forms. Accountants work with businesses large and small, as well as individuals, to provide accurate advice and preparation on topics such as taxes and financial performance. They are usually highly regulated and hold government-sponsored certifications that may or may not be recognized outside their area of certification.
- Estate planning: Estate planners work specifically with individuals to arrange and plan for the handling of assets after a person’s death. They provide an extremely important service to individuals during their lifetime, navigating the legal framework that applies to that person or group, which often changes over the years.
- Insurance agent: Although they may go by a variety of names from financial agents to consultants, insurance agents specialize in offering products ranging from life insurance to disability insurance, as well as a variety of other options. Although insurance may not seem like an investment, insurance can be a known, consistent expense that avoids large unknown expenses in the investment process.
- Fund advisor: Much less well known are these advisors who specialize in mutual funds. They make recommendations on which funds would work best in a person’s portfolio. Often these advisors work with or are given this designation along with other financial advisors.
- Chartered financial analyst: It is unlikely that you will come across a Chartered Financial Analyst (CFA) offering their services on their own. More often, they are those who work for or manage mutual funds or hedge funds. Unlike most other advisors, these analysts are in the best position to give advice on a particular investment choice.
- Stockbroker: Although brokers are not specifically advisors, their function is worth mentioning. Stockbrokers are actually the only ones licensed to trade financial securities or products in most places. Although most people use large institutions like Fidelity or Charles Schwab, there are still individual brokers who provide advisory services to individuals.
An important part of your finance team should be someone who can advise you on taxes and regulations. It is important that you get this person right at the beginning of your investment journey.
Investment tax and regulations
Financial markets are one of the most heavily regulated industries in the world. The interconnectedness of global markets, coupled with the vast amounts of capital and historical pitfalls, keep them under constant scrutiny by government regulators. However, to ensure the efficient flow of funds and transactions, countries are also working with markets to streamline processes and maintain transparency and stability. Governments themselves often set different investment tax rules to encourage or discourage certain types of investment. Regardless of where in the world an investor lives, there are basic concepts that can help everyone.
- Country specific rules & taxes: Although many countries have similar rules for transactions, the rules and tax treatment of investments vary widely around the world and even within countries. How much tax is due may depend on what was invested in, how long it was held, who did it, why it was undertaken, as well as where the investors are located. Each investor should work with their own local legal and accounting professionals to understand what rules they must follow and what tax rates apply to them.
- Tax deferred or shielded accounts: Many governments offer regulated investment accounts such as 401K, IRA, pensions and more that have different tax treatment than regular investments. These accounts are taxed either before the money is deposited or when the money is withdrawn. While the money is in these accounts, the investments are shielded from all forms of taxation associated with investments.
- Accurate reporting: Regardless of the country, accurate reporting of all transactions and contracts forms the basis for price discovery (the act of determining the price at which a transaction will occur) and contracts. Withholding or manipulating information typically results in heavy fines and penalties in any country. While the amount of information required may vary from country to country, these requirements are applied uniformly to all market participants to create a level playing field.
- Capital gains: Capital gains refer to the change in the market value of an investment over time. If you buy a share of a company at $100 and it is worth $105 a year later, you are said to have made $5 in capital gains. Typically, capital gains are only valued when a transaction is sold or closed. Depending on how long the investment was held and what type of investment was held, tax rates may change. Capital gains also apply to other investments like real estate that was sold at a higher price than it was purchased for.
- Dividends: Dividends are a form of distribution that companies make to return profits to shareholders. These funds may be paid continuously at regular intervals or as one-time payments. Again, dividends may be taxed at different rates than capital gains or ordinary income.
- Coupons: Similar to dividends, coupons are payments guaranteed by debt that are paid out at predetermined, contractually obligated intervals. Unlike dividends, companies or individuals cannot stop coupon payments without breaching the contract, which in some cases can lead to bankruptcy.
An important part of “how to start investing” is avoiding problems with taxes or regulations. Find a good accountant or firm that can advise you on the legal aspect and tax implications of your investments.
Making your first investment
Chances are you’ve already invested in something during your life without even knowing it. Most people stop before they even get started, simply because they don’t know how to get past the first few steps of preparation. Whether you’re preparing for that first big investment, setting up a retirement plan, or deciding to start your own business, there are a few key things you can do to set yourself up for success.
- Setting your goals: If you don’t know where you want to go, it’s really hard to plan how to get there. If you know what you want from your investment, you need to come up with specific numbers and times. The trick is to have multiple plans, to know where your decision points will be and how you will handle them.
- Scenario planning: Creating multiple scenarios allows investors to understand the range of possible outcomes with different inputs. For example, let’s say you’re trying to determine how much you need to save for retirement, but you’re not sure if you’ll retire at 55 or 65. Also, you don’t know if you’ll need $75,000 per month or $100,000 per month to live on for the 30 years after that. Most people can’t change how much they have to start investing. Looking at multiple scenarios may show that you may not be able to retire at age 55, or that doing so would require significant lifestyle sacrifices.
- Be realistic: While it would be wonderful to get a 30% return on your investments every year, the probability is not very high. Investment planning means understanding what is likely to occur, not what you hope will occur. If you work with unrealistic expectations, you will most likely not achieve your goals.
- Risk tolerance: Risk and return go hand in hand. Generally, there is a higher return with more risk. If you know how much risk you are willing to take, this determines the maximum return you can expect from investments. If you know how much risk is acceptable at any given time in your life, you can base your decisions on that.
- Decide how to invest: Most people choose to invest only as addition to their overall income. Generally, this is done through a retirement account and the purchase of real estate as a primary residence. Whether you are risk averse or not, investment products should meet your specific needs. Bank products, such as certificates of deposit and savings accounts, offer simple and safe options for conservative investors who don’t want to do a lot of research, while online brokerages offer a wealth of research for active investors.
- Do lots of research & analysis: Opening a meatball sandwich store in a city populated mostly by vegans may not be the best idea. While investments can be made lightly, those who invest time in preparation and research usually do better. Many successful investors spend time researching and developing their investment analysis methods before they even make their first attempts. Similarly, many stock traders spend months testing their methods before even making a trade. Researching an investment may not provide all the information needed, but it will likely provide a better understanding of the value of the investment.
Once you’ve read all about “how to start investing” make sure you fully research every investment and strategy you plan to make. Thorough due diligence will help avoid costly investment mistakes.
Monitoring your investments
At least once a year, listed companies in almost all countries present their annual financial results in accordance with accounting standards. Some provide guidance and updates more frequently on a quarterly basis. But even between these periods, other events occur, such as stock market volatility, geopolitical events, social changes and more. Part of any investment plan is a way to monitor and measure your investments.
Ways of monitoring investments
- Portfolio analysis: Most of the large institutions offer investors reporting that shows them their current portfolio balance from stocks to bonds. With some, you can even bring in your personal financial information, including mortgages and credit card debt. These comprehensive reports allow investors to see their overall balances by category and compare them over time.
- Filings: Regardless of whether annual or quarterly filings are used, regular reporting from public companies provides insights and financial information about the company’s performance, as well as what they expect for the future. In addition, large investors holding positions in companies often also have to file public documents. Knowing whether key investors like Warren Buffet or Carl Icahn are investing in or selling your holdings will give you an insight.
- Analyst reports: One way to keep track of your investments is to see how others are evaluating that investment. While Wall Street analysts tend to have a bullish bias, the reports and analysis they provide can help you tailor your own research to what others think.
- Company investment material: Most publicly traded companies provide easy-to-read PowerPoint decks and materials on their website to explain their financial information. These materials will help investors who are unfamiliar with accounting concepts understand the company’s performance and future prospects.
- News: Whether it’s a good old-fashioned newspaper or a tweet on Twitter, news can drive a company’s value up and down in seconds. Breaking news of a company’s impending bankruptcy can cause its price to fall in a matter of moments, while lucrative takeovers can cause stocks to surge.
- Change in market value: The simple calculation of what your investment is worth today, relative to where it was some time in the past, provides the most basic answer to how much profit or loss you made.
- Rate of return: While a portfolio of investments can have winners and losers, the portfolio’s total return defines how well your investments perform overall. A comparison against a benchmark index such as the S&P 500 can help investors assess whether they have an edge compared to buying a market index fund.
- Risk: Risk is a metric that is difficult to define and measure, also due to its subjectivity and timeliness. JC Penny would have been a relatively low risk investment in the 1990s but would only be considered a coin toss a few years ago. Most people measure risk based on possible valuations or price changes for an asset over a period of time compared to other similar assets. If a stock is likely to move twice as much as the S&P 500, all things being equal, most investors would assign it twice as much risk relative to the S&P 500.
Make sure you keep a record of all your investments and keep track of them using software or by creating your own spreadsheets and customized reports. Most banks and brokerage firms may already offer professional reporting for your investments. Monitoring your investments properly is an important step of “how to start investing”.
Scaling your investments
Scaling investments is a systematic process of managing investments to maximize return, minimize risk, or both. While scaling an investment may not be possible in all cases, e.g. with real estate, most investments have ways for investors to manage their investments and optimize the returns over time.
- Dollar cost averaging: One of the most popular investment strategies is dollar cost averaging. The simple premise is that timing the market is impossible. Instead of choosing a specific price for entering an investment, investors periodically add more to the investment over time as long as the overall investment thesis is intact. Most people actually do this with their retirement accounts, making regular contributions to the market throughout their careers. Since there are both good and bad times to invest, this strategy uses time to average the returns and avoids picking a bad entry.
- Percentage of capital: A slightly different approach to dollar cost averaging over time is percentage of capital. Instead of using time as the determining factor in entering or exiting a position, prices are used. Investors start with a defined amount of capital that they are willing to allocate to an investment. They then buy a certain amount at a certain price. If the price of the investment falls by a pre-defined percentage, the investor will buy more. This can be done by many variations of how much the price of an investment should go up or down and how much money or what percentage of the overall capital will be used each time.
- Asset allocation: Don’t put all your eggs in one basket. Asset allocation uses predefined parameters or percentages to build a portfolio of investments, with only a certain number of investments falling into a certain asset class such as stocks, bonds, commodities, etc. The strategy is based on the idea that asset classes usually have different characteristics, cycles and movements. Achieving the right balance for a particular investor’s situation can increase the likelihood of a successful outcome.
- Percentage of income: As most people advance in their careers, they earn higher salaries. Instead of contributing a fixed amount over a lifetime, a percentage of the income allows you to increase your investments relative to your financial situation over time. A slightly different take on this strategy is to use a percentage of disposable income. This optimization adapts to additional benefits or burdens associated with higher salaries or life changes (e.g. having children).
- Custom strategy or algorithm: Many investors and traders are constantly looking for qualitative and quantitative factors to determine when to invest and when to sell. The simplest version of this concept is to make an investment based on an idea (investment thesis). For example, you can buy stocks in a clothing store that is likely to have sales skyrocketing. When sales go up as expected and stock prices have surged, sell your stocks and make a profit. If sales don’t go up as expected after a period of time, you have to realize that your idea possibly didn’t work out and it would make sense to reasses your investment.
Don’t forget to ask your financial team for advice on getting more out of your investments, or if you prefer to take care of your investments yourself, learn more by reading other content about how to start investing.
Ready? Let’s make your first investment
Preparation on how to start investing can only take you so far. At some point you have to get your hands dirty and make it happen. Investing can be an exciting adventure with so much to learn. Here are a few things to keep in mind:
- Demo accounts: Many of the best investors use demo accounts to try out their ideas. If you’re not certain, why not build up some confidence with fake money? Using demo accounts can help you discover the mechanics of investing and learn things that you might otherwise have missed.
- Start small: If you don’t have to, there is no reason why your first investment has to be a big one. Start with small amounts of money and learn the ropes. Get used to researching, analyzing, buying and tracking your investments with small amounts of capital. As you become more confident, you can scale your investments and expand your investment portfolio.
- Qualitative or quantitative analysis: There are plenty of stories of people who trade and invest from looking at charts, big data sets or based on price action, and then there are icons like Warren Buffet who invest in what they know. Many different investment styles have merit. Which one you choose comes down to personal preference and aptitude. Often a combination of different investment criteria makes sense.
- Know your price: When you go to the store to buy a chair worth $50, if everyone else is spending $120 would you? Investing follows the same philosophy. As price discovery occurs and investors send stocks higher and lower, sometimes they will be on discount, and sometimes they won’t. If you wouldn’t overpay for a chair, don’t overpay for an investment, unless you have very good reason to do so.
- Be comfortable and know your risk: This point cannot be overstated. Everyone wants to get the most money out of their investments as soon as possible. However, if you lie awake at night worried that your investment could cause you to lose your home, you are taking way too much risk. Bad investments should concern you, but not bother you at night.
- Even small amounts can go a long way: Compound interest can produce huge returns given one factor, time. If you want to start investing at 20 and plan to retire at 50, you have nearly 1/3 more years working for you, than if you started investing at 30.
Conclusion: How to start investing?
Congratulations, if you’ve read all the information in this “How to start investing” guide, you’ve learned the basics of becoming an investor. If you think you’re ready to make your first investment, below is a checklist of bullet points to make sure you’ve covered everything and are ready to start investing:
- Read through the What is investing? section.
- Start with financial planning: Understand how much you can and should invest to meet your personal goals.
- Understand the risk that comes with investing.
- If necessary, build your financial team: Get the right team behind you and read up on regulation and taxes.
- Research investment vehicles: Find an investment vehicle that suits you.
- Prepare for making your first investment: Prepare yourself for investing.
- Keep monitoring your investments: Setup the correct monitoring tools and practises.
- Focus on scaling your investments: Scale your investments to make them grow on the path to financial freedom.
You’ve now reached the end of the “How to start investing” guide for beginners. Remember that investing has a lot of ups and downs, just like the financial markets itself. You can make a lot of money, but you can also lose it all if you don’t know what you’re doing. Only invest what you can afford to lose. To start, choose one investment vehicle, master it, and then start diversifying. If you have any questions, please feel free to leave a comment below.