What is the difference between people with money and investors? It goes without saying that of course, both of them have money. However, instead of spending it blindly, investors spend their money on assets that have potential for promising returns. The key in money management is to stretch your limited resources to buy assets that have the largest potential for returns. Those assets may be education, extending a house, paying down a debt, but can also be in stocks or bonds.
Investing explained
Investing in its nature is inseparable from the risk. At one point, as it slides towards the risk, investing fades into gambling. For example if you decide to trade several stocks in blind, that’s a gamble. On the other hand, if you put the money aside, and pick out the best stocks and stick to it on the long run, you are an investor. Still, playing safe all the time is not always fun. Sometimes you can make fast swoops and hope for quick profits, but don’t let it turn into a habit.
Starting out
People tend to be extremely opinionated when it comes to investing. You will eventually meet them all.
- There are those who are preparing for doomsday. They believe that the financial system will collapse, so they are investing their money in gold and real estate. Buy land, “…because God doesn’t make it anymore”, as Mark Twain once said.
- Then, there are optimists and opportunists – day traders who put their trust in their numerous monitors.
- Indexers, whose strategy is to invest everything, believing in the slow and steady increase in the overall values of the markets.
The secret of successful investing is to diversify your investment as a combination of low-cost mutual funds and exchange-traded funds, with having 10% of individual stocks on top of your assets. In order to begin, you need to choose your platform, account type, and (of course) your investments.
Available platforms
There are several platforms that are available to investors. These include online brokerages, full service brokers, specialty brokerages, direct mutual fund accounts, and dividend reinvestment programs. Mutual funds, or ETFs, are ideal for beginner investors.
On the other hand, if you are not interested in individual investments, specialty brokerages can get you exposure to the total stock and bond market. Basically you deposit the money as you would deposit in your savings account, chose the risk tolerance from 1-10, and let the broker invest your money in the overall market.
What account should you choose?
You have two options. You can either invest in an individual retirement account, known as IRA, or a general taxable account.
- Although an IRA offers substantial tax advantages that should motivate you to save for retirement, there is a limit on how much you can deposit to the account each year as well as when you are allowed to withdraw the money. On the other hand, if you are new to investing, you can certainly afford to start setting money aside for retirement. It is definitely wise to begin with an IRA.
- Still, if you already have a retirement account, or you need to invest in buying a home or starting a business, a general taxable account will be perfectly fine.
Choosing investments
Until you get some crust, the best option is to keep to mutual funds or exchange-traded funds. They allow you to invest in a broad portfolio of stocks in a single transaction, which you would otherwise have to trade yourself one by one. In addition, you can try your skills in buying some penny stocks. They don’t require much investment, and can yield a sweet profit when you least suspect it.
Making sound investment decisions from early on require you to learn the basics and filter the noise. Otherwise, the only thing you need is an Internet connection and some savings in your pocket.
"John J. Stone is a regular contributor at Bizzmarkblog. He spent a better part of his life working as a business consultant. Always on the move and keeping up with the latest developments in technology, through years of experience he became a devout believer in the notion that form should always follow function and that developing the ability to think outside of the box is a prerequisite of being a successful entrepreneur. In his spare time he enjoys playing guitar and watching Formula 1."