Learn To Invest In 10 Steps

 Investing is actually pretty simple; you're  basically putting your money to work for you so that you don't have to  take a second job, or work overtime hours to increase your earning  potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.                
 

Step 1: Get Your Finances In Order

 Jumping into investing without first examining your  finances is like jumping into the deep end of the pool without knowing  how to swim. On top of the cost of living, payments to outstanding  credit card balances and loans can eat into the amount of money left to  invest. Luckily, investing doesn't require a significant sum to start.

 

Step 2: Learn The Basics

 You don't need to be a financial expert to invest,  but you do need to learn some basic terminology so that you are better  equipped to make informed decisions. Learn the differences between  stocks, bonds, mutual funds and certifitates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification  and market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points.

   

Step 3: Set Goals

  Once you have established your investing budget and  have learned the basics, it's time to set your investing goal. Even  though all investors are trying to make money, each one comes from a  diverse background and has different needs. Safety of capital, income  and capital appreciation are some factors to consider; what is best for  you will depend on your age, position in life and personal  circumstances. A 35-year-old business executive and a 75-year-old widow  will have very different needs.

 

Step 4: Determine Your Risk Tolerance

 Would a significant drop in your overall investment  value make you weak in the knees? Before deciding on which investments  are right for you, you need to know how much risk you are willing to  assume. Do you love fast cars and the thrill of a risk, or do you prefer  reading in your hammock while enjoying the safety of your backyard?  Your risk tolerance will vary according to your age, income requirements and financial goals.

 

Step 5: Find Your Investing Style

  Now that you know your risk tolerance and goals,  what is your investing style? Many first-time investors will find that  their goals and risk tolerance will often not match up. For example, if  you love fast cars but are looking for safety of capital, you're better  off taking a more conservative approach to investing. Conservative  investors will generally invest 70-75% of their money in low-risk,  fixed-income securities such as Treasury bills, with 15-20% dedicated to  blue chip equities. On the other hand, very aggressive investors will  generally invest 80-100% of their money in equities.

 

Step 6: Learn The Costs

  It is equally important to learn the costs of  investing, as certain costs can cut into your investment returns. As a  whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge  commissions. For investors starting out with a smaller investment, a discount broker  is probably a better choice because they charge a reduced commission.  On the other hand, if you are purchasing mutual funds, keep in mind that  funds charge various management fees, which is the cost of operating  the fund, and some funds charge load fees.

 

Step 7: Find A Broker Or Advisor

  The type of advisor that is right for you depends on  the amount of time you are willing to spend on your investments and  your risk tolerance. Choosing a financial advisor is a big decision.  Factors to consider include their reputation and performance, what  designations they hold, how much they plan on communicating with you and  what additional services they can offer.

 

Step 8: Choose Investments

  Now comes the fun part: choosing the investments  that will become a part of your investment portfolio. If you have a  conservative investment style, your portfolio should consist mainly of  low-risk, income-producing securities such as federal bonds and money  market funds. Key concepts here are asset allocation and diversification.  In asset allocation, you are balancing risk and reward by dividing your  money between the three asset classes: equities, fixed-income and cash.  By diversifying among different asset classes, you avoid the issues  associated with putting all of your eggs in one basket.

 

Step 9: Keep Emotions At Bay

  Don't let fear or greed limit your returns or  inflate your losses. Expect short-term fluctuations in your overall  portfolio value. As a long-term investor, these short-term movements  should not cause panic. Greed can lead an investor to hold on to a  position too long in the hope of an even higher price – even if it  falls. Fear can cause an investor to sell an investment too early, or  prevent an investor from selling a loser. If your portfolio is keeping  you awake at night, it might be best to reconsider your risk tolerance  and adopt a more conservative approach.

 

Step 10: Review and Adjust

  The final step in your investing journey is  reviewing your portfolio. Once you've established an asset-allocation  strategy, you may find that your asset weightings have changed over the  course of the year. Why? The market value of the various securities  within your portfolio has changed. This can be modified easily through rebalancing.