As a new investor you may have heard a lot of things about investing that can seem confusing and sometimes contradictory. Investing is an important part of securing a financial future and making money, but the road to investing is sometimes paved with misleading information. Here are five things that every new investor should know and keep in mind:
1) Investing is not gambling
Too often you may hear stories about a friend of a friend, or an uncle somewhere, that made a million overnight in the stock market. In a similar fashion you might hear that someone lost everything. You may be thinking, “if I pick the right one, I can hit it big.”
That is gambling, not responsible investing. While it works out sometimes, the goal of investing is not to make or break it overnight. Investing should involve time, don’t expect that your portfolio is going to make you a millionaire by next week.
2) You don’t have to invest a small fortune to get started
Many people wait until they have a large sum before deciding to invest. While it is important that you don’t invest money that you can’t afford to not have access to, it is not necessary to lay down thousands of dollars to begin investing. Many times you can begin investing with a small sum, as little as fifty dollars.
Dollar Cost Averaging is an excellent investing strategy that incorporates investing with small sums. Periodic additions to your portfolio can really make your investments grow.
3) Diversification is your friend
You’ve probably heard the adage “don’t put all your eggs in one basket.” This is very true with investing. You don’t want to sink all of your money into a single company’s stock. An easy way to quickly diversify is to purchase exchange traded funds (ETF’s) or mutual funds.
Both exchange traded funds and mutual funds are a compilation of many stocks into a single fund so that by buying a share of this fund you are actually buying into a portfolio of many securities. There are funds to meet all manner of investment interests and goal, make sure to read the fund’s prospectus carefully to understand what you are buying.
4) Don’t get emotional
Becoming attached to a single stock or security is not a good way to do business. Very often investors, especially new investors, form an attachment to a particular company or stock and will sink money into it even when it is a bad investment.
Although you may really love shopping at a particular store and the employees there are really nice, that company’s securities may not be the best investment. And even if it is a great investment, it shouldn’t be your only investment.
You may love Starbucks stock, it may have made you money in the past, but that doesn’t mean to dump all of your investments into Starbucks. Money is an emotional issue for a lot of people, but emotions have no place in your portfolio. A security isn’t going to increase in value because you love it.
5) Buy low, sell high
This may seem obvious, but this is where most investors get it wrong. Warren Buffet’s investment strategy included a policy of purchasing stock from a company that is having a serious but fixable problem that is depressing the stock value. Buy securities when the stock price is low, and sell it when the stock price is high.
This is why a security losing value, even a security in your portfolio, is not a bad thing. It is an opportunity for you to purchase shares. Remember tip number four here, don’t get emotional. When stock prices soar people rush in to buy, when stock prices drop people panic and sell; they are buying high and selling low.
Effective investing means bucking that current and buying low and selling high.
Welcome to the world of investing, it is an important step towards a healthy financial future and retirement. Keep these five tips in mind as you determine your financial plans, but don’t be afraid to seek out help if you need it. Visiting a bank or investment professional for more advice is never a horrible idea.