What is investing all about? How do you start?
If you have decided to enter the world of investing, learning how to invest must now dominate your time and focus. Two steps will help you on your way.
Defining investing
In essence, investing involves spending your time, effort and resources to attain a higher objective. For instance, you spend weekends with a social group to do charitable work, use your talent in the arts to create works of beauty and value or apply your profession in your job or your business to earn a living. In the same way that you do these things hoping to gain valuable rewards, you likewise invest your money in a bond, mutual fund or stock, just be careful of investment scams online, but with the goal of achieving material benefits in the future.
Eradicate your debts now
Now that you are eager to go ahead and start investing once you learn how to, you certainly would want to know the next step. But rein in your enthusiasm for a while. Hold your horses while you check if you are really ready to take the ride of your life in investing. Now that you see the possibilities opened to you through the magic of compounded returns, you have to protect yourself from the same trap which you could be unwittingly locked in. Do away with high-interest debts that you may have at the present.
Reward yourself first of all
To succeed as an investor, you must make investing an integral part of every day. That may sound difficult or tedious; but not really. You must realize that the act of buying something, say a cappuccino, will influence your daily finances as much as acquiring a home-equity loan to cover your credit-card payments.
Active and passive methods of investing
There are two primary methods of stock investing: active and passive management; and they differ on how stocks are chosen, not on how you choose your verbs. Active investing involves selecting stocks yourself or you can ask your brokers or fund managers to pick the stocks, bonds, and other forms of investments. Passive investing requires you to let your holdings follow an index which a third party makes.
Speculating versus investing
Perhaps, you may have heard of a close friend who struck it rich with options. Or you may have had moments of lucky streaks in the past where you won a sizeable amount of cash from a raffle or lottery. Why should you then enter into a long and slow process of investing your money which can only bring you a double-digit gain and not bundles of cash right away? Investing demands years of patience before you can finally reap the good harvest. What if you cannot wait that long?
Planning and setting objectives
Investing is a long-term process, like planning a long vacation. Ask yourself these questions before you embark on this endeavor:
• What is your destination? (What financial goals do you have?)
• How long is your vacation? (What is your time frame in investing?)
• What should you bring along? (What investments forms will you choose?)
• How much gas do you need to use? (How much will you invest to achieve your goals? How much can you invest a regular plan?)
• Do you have stopovers on the way? (What short-term financial expenses do you have?)
• How long is your vacation? (Will you have to retire using your investment?)
• If you run out of gas because you frequently stop to rest and drive through the night, you are bound to spoil your vacation. So it is if you do not save enough money, if you invest haphazardly or fail to invest at all.
How stock trading works
Now that you have set your finances in order and you have also established definite financial objectives, you are now ready to learn how to begin investing. With mutual funds, the procedure is quite easy: Call the fund company and request them to open an account for you. Dealing with stocks can be a more challenging endeavor.
The dangers of margin
Through a brokerage account, you can choose between a cash account or a margin account. A cash account allows you trade using available money you are willing to invest. A margin account allows you to buy stocks using other people’s money – which you borrow. Margin accounts can be attractive for obvious reasons; however, the risks can be significant.
Summary
Now that you have gained enough background information on how to start investing in stocks, as well as what your financial goals are, how much money you will need to invest, how long it will take to recover your investment, the next move is to begin considering where to invest and the kind of potential gain you hope to make.
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