Investing doesn't have to be a scary process, but when you're just getting started it may feel that way. The problem is that so much of the advice out there is catered to those who have some experience investing. You read articles talking about a stock's Beta, P/E ratios, bull markets, bear markets, emerging markets and the supermarket? It's like reading a foreign language.
The concept of investing is simple. You are basically buying a piece of a company or companies. By holding a share of stock, you are now an owner of that company. Granted your share is a miniscule fraction, but you own it nonetheless. That's it. Nothing complicated about it.
The mechanics of how you actually buy your share in a company is simple as well. It consists of opening an investment account and picking your investments.
Opening an Investment Account
In order to actually put money in an investment you will need an account with a broker. Your broker is the one who actually places the trade for you. As a beginner, you will be far better off with a discount broker. The additional services that a high priced personal broker provides aren't useful unless you have a significant amount of money to invest.
This view is shared by Dan Caplinger from The Motley Fool who says, “The better long-term answer is to pick a discount broker that won't charge you a huge amount in fees…In particular, look for brokers that have arrangements to offer mutual funds or exchange- traded funds at no commission, as these investments can be the best way to get started investing.”
These discount brokers often offer extensive web portals where you can make all of your investment decisions without needing to actually meet with a broker in person.
Picking Your Investments
The key to investing, no matter if you're a beginner or experienced is diversification. Natalie Cooper from BankingSense.com says it well, “Investing comes in many forms—stocks, funds, bonds, savings. What you want in your portfolio is diversification so that if the worst happens, you’re not left penniless.”
Diversification protects you from losing everything when an investment doesn't perform. While it's rare for a stock to become completely worthless, it hurts far less when that stock only makes up 5% of your portfolio.
Achieving a truly diverse portfolio is difficult as a beginner. You probably don't have enough money to hold stakes in dozens of investments and even if you did, picking that many investments is no small task.
Personal finance guru Suze Orman offers some advice. “How do you diversify if you don’t have a lot of money? By buying either a noload mutual fund or an exchangetraded fund (ETF). An exchangetraded fund operates like a stock but it’s really a tracking index.
Either one of those two is a great way to give you diversification.” As a beginner, mutual funds or exchangetraded funds are you best options. They're much easier to pick and they provide instant diversification.
The Importance of Long Term Thinking
Investing is a long term process. The real magic happens when you let a portfolio grow for a decade or more. During this time, the market will go up and down. Don't get discouraged by fluctuations in the market. Stay motivated knowing that this is just part of the process. By following the basics outlined here, you will have a good foundation that you can build on as your portfolio and experience grows.
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