Investing is difficult. Risks abound. Profit is often only gained with great patience and a bit of luck. Yet there are some measures you can take to make it more likely that your investments will succeed. Some things to think about before investing are making a personal financial plan, evaluating your risk-taking comfort zone, diversifying your investments, and paying off high-interest debt. Ten things to consider when investing are as follows.
1. Make a personal financial plan
Having a plan will help you to invest in an organized and systematic way. Define your goals. Analyze your situation. Prepare your plan step-by-step. Apply your plan in a disciplined way.
2. Evaluate your risk-taking comfort zone
Everyone’s risk-taking comfort zone is different. Emotions play into investing. It’s tempting to sell when a stock is doing poorly and to buy when a stock is doing well. But following your emotions in this way is very likely to result in failure. Know your limits. If you are likely to succumb to emotion, it’s very important to invest conservatively. But if you can control your emotions, it might be profitable to take greater risks.
3. Consider a proper investment combination
Maintaining a diverse portfolio is an important rule of investment. Keeping all of your money in one stock or sector will make you more vulnerable to volatility. Invest your money in as wide a set of sectors and vehicles as possible. Hedge your riskier investments with more stable categories. This way, if one sector falls, your other investments can offset your losses.
4. Be cautious when investing extensively in employer stock or any individual stock
Investing too much in one stock can result in major losses. Try to maintain a diverse variety of investments. It’s tempting to divert a lot of your salary to stock in the company that you work for. Yet the rule of diversification still applies. Just because you work for the company doesn’t mean that it will not go under.
5. Make and keep an emergency fund
Keeping cash is one way to hedge your investments. Your cash flow may be interrupted suddenly or unexpectedly. You could lose your job, your health, or your family at any moment. Be sure that you have enough free money to meet your basic needs for at least three months. This way, if catastrophe strikes, you’ll be able to weather the storm.
6. Clear high-interest credit card debt
Many of the greatest thinkers and moralists in history have condemned the practice of usury. This is because the compounding of interest can result in unmanageable levels of debt. One of the best investments you can make is to pay off your debts, particularly those that have high-interest rates. If you’re accumulating 10% of compounding interest every year, it will be difficult to offset that through your other investments. 10% is a relatively low rate, too; many credit cards carry over 25% interest rates. Failing to pay these kinds of debts is a recipe for financial disaster.
7. Think about dollar cost averaging
One tactic that investors use is to invest money gradually. Having bought a certain amount of stock, they buy more when the price of the stock goes down. This reduces the average dollar cost of the stock they own. It’s also wise to set out a plan for selling stock. For example, you can plan to sell when a stock has gone up by a certain percentage. Doing this successfully will help to maximize the profit you make from investing.
8. Utilize your employer’s “free money”
One benefit that employers sometimes provide is stock options. Be sure to take advantage of this. This way, you will benefit in an additional way from the hard work you’re doing to help your company succeed. You’ll also be able to consider yourself a part-owner of the company you’re working for. This may boost your morale and productivity.
9. Consider rebalancing your portfolio on occasion
Putting a bit more money in a fashionable or emerging sector, and taking a little from a currently less-favored sector, while still maintaining a position in it, is called “rebalancing”. The world of investing is constantly shifting. The most profitable sector during one period of time may become a laggard in the next. Keeping abreast with the ebb and flow of the stock market will help your investments to succeed. Yet, at the same time, maintaining your former investments can be a good long-term strategy.
10. Avoid situations that may lead to fraud
Fraud is definitely something to avoid. Fraud has major legal consequences. Furthermore, engaging in fraud may cause your reputation to suffer lasting or even irreparable harm. It’s possible to behave in a legally- and ethically-upright fashion and still make a profit. Don’t give in to the tendency to cut corners, engage in trickery, or present someone else’s work as your own, merely for the sake of some paltry short-term gain that will vanish with the slightest gust of wind, leaving you with nothing.
What is Investing?
The word “invest” comes from the Latin investio, which basically means “to clothe”. Generally speaking, people holding offices of authority wear special costumes, and so “investment” came to mean the action of conferring upon someone an office of authority. As a development from this sense, the word came to mean “to confer upon a person or enterprise the authority to spend one’s money”. When you invest in a company’s stock, you give the owners of the company the authority to spend your money for both your benefit and theirs. This sense of “investment” broadened further, and has taken the meaning of “any use of money undertaken with a view to profit”.
How can I start Investing?
An easy way to start investing is to download a stock brokerage application on your mobile phone. After going through a few steps, including the depositing of money from your bank account, you can purchase a company’s stock. However, the word “investment” has broader meanings as well. Any use of money that can be expected to bring future gains can be called “an investment”. So, for example, although paying off your credit card debt is not technically an investment, doing so will probably be healthier for your short- and medium-term finances than almost any other step you can take. Similarly, obtaining the proper certification and licensure for your chosen profession through a state institution could be the most profitable “investment”, on the whole, that you make.
What are the types of Investments?
The following is a list of the types of investments.
- Stocks: These are shares in publicly-listed companies. Buying a share makes you a part owner of the company. This can be profitable in the form of dividends paid out by the company, or it can be made profitable by selling shares at higher prices than those for which they were bought.
- Bonds: These are essentially loans paid by the investor to governments or companies. These loans carry a set amount of interest. Bonds, especially government bonds, are seen as lower-risk investments than stocks.
- Mutual Funds: These are agglomerations of money paid by different investors. These funds are invested and managed by professionals.
- Exchange-traded Funds: These are similar to mutual funds, with the exception that they are traded on public markets. New investors are often recommended to buy exchange-traded funds because they offer more diversification than the stocks of specific companies.
- Commodities: Commodities are raw materials like metals, foodstuffs, and the like. These can be bought and sold on public markets, with profit being obtained by buying for low prices and selling for high prices.
What are the best investments for beginners?
The following is a list of the best investments for beginners.
- Mutual funds. Mutual funds are agglomerations of money managed by professionals. Investing in mutual funds puts investors at a remove from the fluctuations of the stock market and the waves of emotion they evoke.
- Exchange-traded funds. Exchange-traded funds are agglomerations of money, usually invested in specific sectors. Because their price is based on the price of a variety of stocks, they suffer from less volatility than individual stocks.
- Real estate. The value of real estate and real estate funds is based on the value of land and rent. These investments bring in more-predictable returns than individual stocks.
- Individual stocks. Although buying individual stocks is riskier than exchange-traded funds, it also offers the potential for higher rewards. Beginners should be careful when buying individual stocks and should be aware of their limitations.
Every type of investment has its advantages and disadvantages. The best types of investments to make depend on your risk tolerance, level of understanding of certain markets, and reasons for investing in the first place.
Is Investing the same as gambling?
No, investing is not the same as gambling. This is mainly because the hoped-for returns on investments are not based on random outcomes. By engaging in research and “due diligence”, you can make it more likely that your investments will be a success. However, it could be said that investment that is not based on research is very similar to gambling. In any event, the investment carries a certain amount of risk. Investing, especially uninformed investing, can result in losses similar to those incurred by unlucky gamblers.