Why people invest? Investing creates more money, which in turn, helps you to fund your lifestyle and plan for financial hardships. When you invest, you devote your time, resources or effort to some specific endeavor with the expectation that it will generate a return in the future.
Entering the world of investment isn't easy, you need to have a certain level of knowledge and skill because taking your first step in the market without knowing what you're doing and where you're heading is a very dangerous move. Be sure that you are well-informed, there's a huge amount of information available on the Internet to make yourself equipped before investing in an institution.
There are various ways to invest – stocks, bonds, certificate of deposit and mutual funds are some form investments you can choose from, just be careful of investment scams. But before venturing your way down the road of investing, consider learning the basics here.
Your debts, remove them first.
Before starting to invest, make sure that you don't have high-interest debt existing. Why? Because all the effort you'll put in investing will be useless if you don't take necessary action about it. It would be better paying your debt first as such would negate all your efforts in investing.
There's an active and passive management in investing.
There are two main methods you'll encounter when you are stock investing – active and passive management. Active investing involves choosing your desired investment type while a passive investing involves a third party. Stock investing is commonly referred as active investing, but this type of investing strategy doesn't have favorable outcomes at all times.
Analyze the situation before investing.
Remember, investing isn't a casino slot machine lever where you can magically gain a huge amount of money once you get lucky. When you are investing, years of patience and discreet assessment of a company are required before you can finally reap a good harvest.
In line with this, when you commit your money to something you don't understand then you are gambling with the possibility of losing the money you invested. It is necessary that you do research before investing in a specific company and do not immediately believe the opinions and speculations of another person. If your friend told you that a certain company will definitely boom in the following years, make sure to do a little research about the company first and its performance before throwing your hard-earned cash at it.
Planning and setting financial goals.
Investing is a long careful process and you need to ask yourself a lot of questions before undertaking the road to investing.
- What are your financial goals?
- How long is your time frame in investing?
- What type of investment will you choose?
- How much money are you willing to invest to achieve your financial goals
- What short-term financial expenses do you have?
- Will you have to retire using your investment?
Learn how the stock trading works.
After establishing concrete financial goals, you can now learn how to start making your investments. In mutual funds, call a fund company and request to open an account for you. In dealing with stocks, New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the Nasdaq Stock Market are the major US exchanges. Stocks are traded on various stock exchanges, they all have a different mode of trading but the process of buying and selling shares are all the same.
Buyers and sellers connect during stock exchanges. The buyer will make a “bid” (the share price they are willing to buy), while seller “ask” (the price of the share they are willing to sell). The “spread” is the difference between the two, which are often goes to the professional who handled the trade exchange.
The most common way to buy a stock is through brokerage accounts. There are full-service workers and there are discount brokers who offer their service at a not too expensive price.
Cash account and margin account and where you should be.
In using a brokerage account, you can use cash account or a margin account. In a cash account, all transactions are done by using the only money you actually have. While a margin account, let's you buy a stock with borrowed money from other people's cash. The latter can be quite appealing but there's risk taking that road.
Brokers will usually endorse margin accounts, as those will create more commissions for them. Though borrowing money will increase your chances of buying more stocks, it will also take you to risk because you'll have to pay all that margin money at some point. Therefore, margin accounts are great if your investments are soaring high in value but can cause uncertainty if it isn't. This type of investment is not advisable for beginners like you.
Direct Investment Plans (DIPs) and Dividend Reinvestment Plans (DRPs)
If you aren't ready for a brokerage account then consider one steadier way to buy stock. Investors call it as Drips. DRP's and DIPs are offered by corporations that allow shareholders to buy stock directly from them at low cost or fees. Not every company offers this kind of opportunity but they are great for beginners who can only invest small amounts of money.