Whether you’ve just decided to start investing or you’re still on the fence, spending can be an overwhelming endeavor. However, it is also the best thing you can do to secure your financial future. It is available for everyone, not just those who have extra cash. You can get started with a little bit of know-how, formulating a plan, and familiarizing yourself with the tools available.
But before you start investing, it’s essential to build your safety net in case something goes wrong with your investment. Furthermore, knowing that you’re covered against sudden emergencies will make you a bolder investor, which can net you higher returns for your finances.
Set up an emergency fund with three to six months’ worth of expenses. Don’t worry about making returns from your emergency fund; place them in a safe account that can be accessed quickly. Establishing your emergency fund lays the groundwork for working on your long-term goals, such as buying a home, saving for college or retirement.
If your employer offers a 401(k), participate in it. If you don’t have access to a retirement plan via your employer, open either a traditional IRA or a Roth IRA. Check also for the health of your insurance policies, including auto, health, home, and life insurance, among others.
After you’ve sorted out your safety net, you are ready to begin investing.
To understand where to begin investing, familiarize yourself with the different investment vehicles available.
When people think of investing, the first thing that comes to mind is stocks, which refers to owning a share of a business. When you buy a stock, you make yourself a part-owner of a company. If the company does well, the value of the stock goes up, and the company will probably pay you a dividend—a part of their profits. However, if the company does poorly, your investment will lose value as well.
Investing in bonds essentially means that you are lending money to the issuer of the relationship. The issuer also agrees to pay back the money, along with interest at a stated rate.
Unlike a stock or bond, investing in products means investing in something that has inherent value, like oil and natural gas. To trade commodities, people buy and sell “futures,” which is an agreement to purchase a commodity at a specified price in the future.
- Real estate
Investing in real estate can be lucrative yet risky at the same time. You can buy a property and rent it for income. Flipping homes have also garnered substantial income for others. This means that you buy a property that is in need of renovations, fix it up, and sell it.
- Mutual funds and ETFs
Some investors prefer holding a fund as it spreads the risk across many companies. While it dampens the returns, it also protects you from risks. For real estate investors, they can minimize the risk by investing in a real estate investment trust or REIT fund.
- “Buy low, sell high.”
Buying undervalued assets is one of the most common investment strategies. It ensures high returns for the investor who bought a stock at a price lower than the selling price. To determine if a stock is undervalued, you can calculate the price-to-earnings ratio (P/E), or check a company’s earnings growth, dividend yield, and profit margins.
- Invest in something you’re familiar with
Familiarity with a company or industry is vital to understanding revenue models as well as future success. But here’s a good rule of thumb: no matter how familiar you are with a company or industry, do not put all your eggs in one basket.
- Avoid following the crowd
It’s easy to get caught up in what a large group of people is doing. This herd mentality is the reason behind a lot of wild fluctuations in stock prices. We often buy stocks because other people are buying them, and we sell shares because other people are selling them. Unfortunately, doing so is one easy way to compromise your investments. According to investing legend Warren Buffett, it’s important to keep a level head, which has helped him get to where he is now.
Another critical investment strategy is making sure to diversify your portfolio. It diminishes your risk of losing a substantial amount of money when something goes wrong in one company or industry.
- Open an account
When you’re ready, open an account. You can do so through a brokerage firm such as Fidelity or Charles Schwab. You can quickly open an account online or through a local branch. Then you can decide whether to choose your investments on your own or work with a staff advisor.
The information you find here are just the basics. There is more to learn after you open your account. So, keep an open mind and learn as much as you can to start investing. Soon enough, you’ll be investing like a pro.