Investing money is a vast, complicated ordeal that requires substantial knowledge and practice, whether you’re intending to buy and sell stock, build and rent out office space or invest in a retirement savings program. Because of this complexity, taking your first steps on the road to successful investing can seem daunting; however, every hopeful investor can benefit from understanding these basic ideas.
What is investing?
Basically defined, investing is putting money into something (referred to as an “investment vehicle”) that will bring you more money in the future. There are many investment vehicles, such as buying stocks or raising livestock, but they all are made with the same intention: some money goes in, more money comes back.
Also, you must invest with the knowledge that any investment comes with a certain degree of risk and could end in the loss of the “principal,” or the money that you put in.
Chart your course
The Securities and Exchange Commission suggests that before choosing investments, it is best to figure out your goals. In particular, you should decide what financial goals you want to achieve, decide which goals are most important and, finally, decide how long you have to meet each goal. For example, if you have a new baby and want to save for that child’s college fund, it would be a more immediate goal than your retirement fund, so investments toward college would have a time frame of about 18 years.
The SEC also suggests that you pay off any credit card or other high-interest debt before investing, pointing out that almost no investments can counter a bill with an 18 percent interest rate.
Choosing investment vehicles
There are many vehicles in which to invest, so keep in mind a few general guidelines.
First, correctly gauge your risk tolerance. Investopedia recommends thinking about risk in terms of when you will need the money — a person in their 20s or 30s saving for retirement can take significantly riskier investments than someone doing so in their 60s. To put it another way, as the goal gets closer, you should ideally partake in fewer risky investments.
To alleviate some of this risk, and to compensate for the fact that investments hold some inherent risk no matter the vehicle, the SEC tells investors to diversify their investments, using the old adage, “Don’t put all your eggs in one basket.” The idea is that if one investment should fail, the others can make up for the loss.
Both Investopedia and the SEC stress that any new investor should thoroughly understand the risks of any investment before contributing any money, as well as any fees associated with buying, selling or holding onto the investment.
From here, investing your money intelligently will involve researching several of the many different investment vehicles and doling out money. However, armed with these basic tools and guidelines, you are much better-equipped to make good decisions on sound investments.