Instead of working for money, you can have your money work for you. But figuring out how to invest it can be not only challenging but also anxiety inducing. You’re not sure what you’re doing and you don’t want to lose the money you worked hard for.
It’s impossible to cover everything there is to know in one article and too much information can be overwhelming.
Hopefully the following tips will help you gain enough clarity, confidence and interest to take your very first steps in financially preparing for the future.
Research your options
When you invest your money, you are basically either buying a portion of a company or a commodity and your profit comes from the value of said company or commodity increasing over time.
Your main options are:
- The Stock Market: On the stock market or stock exchange you can buy, sell and trade stocks, small portions of a public company. The price is determined by how much money that company is making. Your profit comes either from dividends, rewards usually consisting of cash payments made by the company to its shareholders, or by selling your stock at a higher price than what you paid for it.
- Investment Bonds: Typically considered “less risky” than the stock market, they are essentially loans to a company or a government. The company or government will pay you interest on this loan for the duration of its lifecycle. Bonds may offer a smaller potential for returns, but some also offer a guarantee that you won’t get back less than what you invested.
- Mutual Funds: Investing in a mutual fund means investing in a portfolio of stocks, bonds and other securities managed by a professional money manager in exchange for a fee. Each shareholder is involved in the fund’s gains and losses.
- Savings Accounts: You simply put your money in a saving’s account and collect interest. The least risky option but also the least profitable one.
- Physical Commodities: Such as real estate, buying gold or silver, you invest in a tangible object that you can later sell at a higher price.
Make a plan
In order to have a stable investment plan you need to ask yourself why you’re investing and what you hope to achieve. Once you have the answers to these questions, you can pick which options are most likely going to help you reach your objectives.
Your plan must include:
- How much money you can set aside for investments
- Time frame of how long you can wait until you access the money you invested
- What risk profile of investments are you comfortable with
- What degree of return you expect
Once you start, you need to keep a close track on all of the investments you have made (it’s better to diversify) with reference to profits and losses. This will allow you to observe which types of trades were most lucrative for you and change your strategy accordingly.
You can also calculate the IRR (Internal Rate of Return) online and be better able to choose which investments go well with your plan.
Develop your own set of rules
Investing can be an emotional activity and impulsive decision rarely turn out to be good ideas. For this reason, it is important to have a set of rules that you follow 100%, you can change them as you gain more experience but you don’t make exceptions based on emotions. It can be anything from spreading your risk by adhering to a portfolio of low-correlation investments or investing only in what you understand.
As you go along you’re going to keep learning new things, or at least you should be. Becoming a good investor implies learning continuously and indefinitely. The more you absorb new approaches and strategies, the more often you will be able to make changes that pay off.
Use stop-loss orders
This is maybe the most important tip in this article. A stop-loss order is an offsetting order that automatically exits a trade once a certain price level has been exceeded, let’s say at 5 percent below the rate at which you purchased the share.
As an example, let’s assume you bought Tesla Inc. shares for $220 each and they’re now trading for $260. In order to participate in any future price appreciation, you want to continue holding the stock. You don’t want to risk all the unrealized gains you’ve accumulated with the inventory so far. The profits are unrealized if you have not sold the shares; they are realized gains after they have been sold. If TSLA shares fall to $250, you decide you’d like to sell out of your position.
Instead of monitoring the market five days a week just to make sure you sell the stocks if the price drops, you can enter a stop-loss order to track it and do it for you.
Keep up with financial trends
Read reports from the industry and examine as carefully as possible broad-based financial data. Whether the Federal Reserve might raise interest rates, or the government launches a massive tax cut, or a war were to break out in Saudi Arabia, you need to be aware of these changes and to consider how they impact your investments. Major events will influence the investments you make, and your responsibility is to recognize how these circumstances can affect the short-term and long-term values of the stocks you hold.
It has been shown over and over again, the more active you are as an investor, the worse the outcomes of your trading. Most people drift from one investment to another, reacting to the latest trends or fads, instead of granting their ongoing investments sufficient time to play out.
Work out a plan, adhere to your set of rules and develop the patience necessary to let your investments produce returns. Stock prices are typically based on businesses, and those businesses take time to grow. They don’t operate by the hour or by the minute, but in three-month windows.
If your goal is to invest like those who seem to always or almost always make a profit, then implement as many of the above points as possible.