How to Start Investing & Actually Make Money
Wading into the wide world of investments can seem like an overwhelming task. Stocks, bonds, mutual funds, dividends, yields, technical analysis--where do you begin? Fortunately, you don't have to know as much as you think you do in order to get started.
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Instructions
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Determine your investment objective. Are you looking for growth, income, preservation of capital or tax advantages? List your objectives in the order of their importance to you. Also determine your time horizon. If you're investing for more than 10 years, you probably need to look at growth investments. Short-term investors should look to fixed-income alternatives.
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Learn the basic concepts that all investments are founded upon. Remember that no matter how complex mathematics get, all you can really ever do is add, subtract, multiply and divide. That's the same in the world of investments. Virtually all types of investments boil down to either debt or equity. All types of fixed-income investments are based on "loanership" because you're loaning your money to the debt issuer in return for the interest you're paid until maturity. Equity investments, such as stock and real estate, represent ownership. The latter category presents higher risk and higher returns. Common stock and real estate are the only two types of investments that have outperformed inflation over time.
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Consider stocks, stock mutual funds and real estate if you're looking for long-term growth. Remember that the stock market has never had a negative return over any 10-year period. But be prepared to ride the ups and downs of the market over time. When you trade stocks, it's easy to become swept away in either greed or fear. But those who make money over time see history, think logically and don't let their emotions control them.
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Look to fixed-income investments for greater safety and current income. Bonds can give you regular interest payments and guarantee of principal. But don't expect these investments to substantially outperform inflation over time as their yields are inextricably linked to interest rates. You can also reap capital gains from bonds by trading them in the secondary market, where their prices fluctuate inversely with interest rates.
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Invest inside an annuity, IRA or qualified plan sponsored by your employer and keep your capital gains and other investment income off of your tax return. Annuities are offered by life insurance companies and allow your money to grow on a tax-deferred basis. They can either pay a guaranteed rate or be invested in variable mutual fund sub-accounts. IRAs and qualified plans offer tax-deferred growth like annuities, but they're not investments in and of themselves per se. They are merely special accounts that you can invest your money in under certain conditions in order to save for your retirement.
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Tips & Warnings
When you begin, you'd be wise to employ a financial advisor to help start you on your journey. You need to know where you're trying to go and how much risk you're willing to take to get there. An advisor can help a beginner find those things out.
