Investing is putting your money into an asset to make a profit. Beyond that simple definition there are many types of investments, ranging from simple savings plans to real-estate to stocks and other securities. The first step to become an investor is to understand the difference between investing and speculation. Reputable traders in high-risk financial markets such as commodities or foreign currency will tell you what they do is speculation, not investing. Wise investing requires only a little money to start. To become an investor the most important assets you can have are knowledge, patience and discipline.
Start saving money to become an investor. Even if you are still in college, you can open a savings account and/or get better interest rates by buying a small CD. These are the simplest form of investments and the safest. The return on your money is limited; they are bank deposits insured by the Federal Deposit Insurance Corporation (FDIC). The sooner you begin saving, the sooner you’ll be able to try more ambitious investments.
Educate yourself thoroughly about any type of investment before you risk your money. You can take courses in investing, real estate and economics at local community colleges or online. Another way to learn the mechanics of investing is to take advantage of the excellent online tutorials and libraries offered by organizations such as Kiplinger’s, the New York Stock Exchange and Investopedia (links under Resources below).
Start with low-risk investments. These include government bonds, blue-chip corporate bonds and stocks, and some mutual funds. You don’t need a great deal of money to start. In fact, almost 2,000 well-established U.S. corporations now offer “direct stock purchase plans” (DSPP) with very low fees. DSPPs allow you to buy stock for as little as a $250 to $500 to start, or automatic debits of just $50 a month.
Develop an investment strategy. For young investors, this usually means emphasizing equity growth, while for those nearing retirement, switching to investments that are stable and produce good income is preferred. Learn about and start taking advantage of tax shelters such as traditional and Roth IRAs early. The longer your investments in these accents have to grow, the more comfortable your retirement will be.
Diversify your investments. Even the most aggressive growth-oriented investment portfolio should include several stocks plus a sizable percentage of low-risk income investments like bonds. The mix will change as your needs change through life, but diversification is the best way to reduce risk. Even the most knowledgeable investor doesn’t anticipate the real estate or stock market correctly all of the time. Limit high risk investments like options to no more than 10 to 20 percent of your portfolio at any given time.
Learn to do your own research. Experienced investors and financial consultants will tell you that the single most common reason investors lose money is lack of knowledge of their investments. If it’s stocks, read a company’s annual report and balance sheet. Survey the local real-estate market and talk to people who know the territory. If your broker recommends a stock, make sure you understand why and learn about the company before investing.
Avoid other common investment mistakes. Far too many investors allow emotion to color their thinking. They will follow the market instead of anticipating it. Here’s what billionaire investor Warren Buffet says on this point: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Ultimately, the keys to being a successful investor are rational planning, knowledge and discipline.
A great way to begin your education as an investor is with two books by Benjamin Graham: “The Intelligent Investor” and “The Interpretation of Financial Statements.” Known as “the father of financial analysis,” Dr. Graham is famous as the man who taught Warren Buffet. Managing tax issues is an important part of investing. The IRS has all of their publications and many “Guideline” articles available online to answer any questions you have.