Finsights

Investing is a meaty topic, so I’ll start with general concepts and gradually get into specifics.

Investing is the act of putting money in assets that will appreciate over time, thereby earning you profits (i.e. capital gains) . Once you have enough money in your savings, you should start to educate yourself on the basics of investing: options to invest in, how to invest in them, and how much you want to invest in each option (i.e. diversification). 

A popular vehicle of investing is stocks, that people buy (&sell) on the stock market (using a broker). Owning a stock of a particular company means you have a part share in the company. 

There are several other related vehicles for investing, including electronically traded funds (ETFs), treasury/municipal bonds, and stock/bond mutual funds. The stock market is very volatile, so investing in stocks is typically more risky than the other types of investments above. Bonds, on the other hand, are backed by the U.S. government, and are typically safer investments. However, they have lower returns than stocks and other ‘riskier’ investments. 

As you become more educated about types of investments that exist and the risks connected to each type, you’ll be able to make better decisions on where to put your money. And by no means is this list of investments above exhaustive: there are many other investment types, which we will cover in later articles.

Stocks

Since there are many different investment vehicles, for this article, I want to focus on one of the most popular investment vehicles: stocks (or equity as they are sometimes referred to).

Step 1: Make Trading Goals

Make clear objectives to focus your stock trading and wealth accumulation. Make sure you have an idea of how much money you want to gain over time and why you want to build that wealth – is it for your kids’ college tuition? Are you saving up for retirement? Whatever it is, you want to have clear objectives before you start investing.

Key Points:

• Your objectives should be as specific as possible, even about the amount of money you want to accumulate. Set goals like, “I want to make $1,000,000 by age 60.”
• Prioritize your reasons for investing. Making enough money to pay off the mortgage on your house might (and should) be more important than saving up for a vacation. 
• Be open to change. Your financial needs will adapt over time, and you will certainly not be in the same place for the duration of your life. Understand that situations will change, and that subsequently, your reasons for investing might change.

Step 2: Decide On The Amount You Are Investing

If you followed the tips on budgeting in the last article, you should have a good idea on how much money you have in your savings. Decide on how much of it you can take to invest, keeping in mind that you cannot touch your emergency fund or savings you may need for other, more immediate reasons. Pick a realistic amount (or percentage), and set that aside for investing.

Key Points:

• Do not forgo debts, especially high-interest debts, for the sake of investing. Pay off high-interest debts such as credit card balances, first.
• Decide on whether you will put in small amounts of money in stocks over time (which is referred to as dollar cost averaging) or if you will put a certain amount at once and wait for it to grow. 
• Never borrow money to invest – at least as a beginner investor – as the stock market is volatile, and the last thing you want to do is lose money on stocks you have bought with borrowed money.
• Take it slow. Don’t worry if you can’t invest a lot of money at once – that money will grow over time, and if you manage your finances correctly and invest responsibly, eventually you will have substantial amounts to invest.

Step 3: Decide On How Much Risk You Are Willing To Take

Determining how much risk you can take on the stocks you invest in is crucial to investing, as every stock has a different risk profile and possible returns.

Key Points:

• Decide if you want to invest in riskier stocks with potentially higher returns (i.e. Nvidia), or less risky stocks that have potentially lower returns (i.e. Apple). 
• Decide on your investment timetable. If you have more time, you can take riskier investments since you’ll have more time to recover from losses. If you are nearing your retirement age or do not have a long time to invest, make more conservative investment choices to minimize losses.
• The amount of risk you take should not negatively affect your finances to such a degree that you are nervous about handling day-to-day expenses. 
• Again, be open to change. The amount of risk you’re willing to take may change over time, based on how your finances and objectives evolve.

Step 4: Decide On Your Investing Style

Now that you understand how much risk you want to take, the next step is to determine your investing style. You can choose to be extremely meticulous with how you invest, by doing extensive research on various industries or keeping abreast of developments in the stock market. You can also choose to be passive, letting other people (or technology) do some of the work for you. 

Choose carefully on how you want to invest. Here are some of the possible investing styles:

1. Do It Yourself (DIY) Investing: If you are confident in your own abilities to invest with little help, this trade management technique can work for you. There are subsets in DIY investing as well:
   1. Active Investing: A brokerage account works best for this as you have full control over your investments, and you’ll trade assets such as stocks and bonds using this account.
   2. Passive Investing: You’ll still utilize your brokerage account, but you might buy shares in ETFs and/or mutual funds. You’ll have control over what funds you invest your money in, but fund managers will do the actual stock trading. 
2. Expert Help: If you need help with investing or would prefer to work with a professional in the field, a broker or financial advisor might work for you. They will advise you on stocks to invest in based on your financial goals and situation, keep track of your portfolio, and help you when there are changes in your financial needs.
3. Technology Help: You can use automated brokerage services, like robinhood.com, to help channel your investments in an automated fashion based on your demographics and risk tolerance. By answering a few questions, the tool will automatically select individual stocks, mutual funds and bonds to buy (and sell) on your behalf, for a service fee.

Step 5: Determine Your Investment Account

There are many different types of investment accounts, including brokerage accounts, managed accounts, and retirement accounts. Unfortunately, I will not be able to explain the intricacies of each account as it might become too long and convoluted, so I will leave that to you to research. What you want to consider when deciding on an investment account is tax implications, trading fees, account maintenance fees, as well as additional features provided that may help you in the investing process. Also, research reputable brokers for your financial needs to make sure you can handle your portfolio efficiently.

Step 6: Put Money Into Your Account

Once you’ve selected a brokerage and investment account, you will be asked to provide your personal information, such as your social security number, employment, and address. This might take you 15-20 minutes. Once that is completed, you are ready to put money into your account.

Here are some ways you can put money into your account:

• Bank Transfer: Most people use this method – all you do is transfer money directly from your bank account into your investment account.
• Check Deposit: You can also mail a check to put money into your account, although this method takes longer.
• Brokerage transfer: You can transfer money from another brokerage, which is called an ACATS transfer. This process takes a few days to complete.

Step 7: Select Stocks

After you have completed the setup part of investing, you are ready to select stocks. Don’t think of this as a “get-rich-quick scheme” because investing in stocks is mostly about long-term growth. Opt for reputable stocks that show strong earnings and potential for consistent growth. 

Here are stock options you can explore as a beginner investor:

1. Blue chips (or Value stocks): These are reputable stocks that have shown strong performance for a period of time. They are usually safer stocks to invest in, which is why they are good for beginning investors.
2. Dividend stocks: Dividend-paying stocks are usually safer than non-dividend-paying stocks, and can offer a recurring income through dividends. 
3. Growth stocks: These are stocks that are growing faster than the market, meaning they have potential to generate more earnings than the average stock on the market. You should target growth stocks in industries that have good long-term potential.
4. Defensive stocks: These stocks are stable and provide consistent profit, even in times of economic downturn. Sectors that have strong examples of defensive stocks are utilities, healthcare, and consumer goods.
5. ETFs: Exchange-traded funds usually track a particular index and are safer as they diversify accounts more than traditional stock trading. You get multiple assets when you invest in an ETF, which lowers your risk.

Step 8: Monitor & Manage Your Portfolio

As you continue to invest in stocks, you must monitor and actively manage your portfolio to evaluate the performance of your portfolio to see how well you are doing. Research frequently, and look at various reputable financial sources to see what they have to say about the particular industries you are invested in as well as the stock market at large. 

And that’s all for today! Hopefully you’ve gotten a good understanding of investing, particularly into stocks. There is a lot to talk about even in just the discussion of stock trading, so you may need to do research on the side to answer any questions you may have. Let me know if there is anything I mentioned that is confusing and could be explained better. Until then, keep learning, and keep being financial savvy!