Investing for Dummies - A Modern Practical Guide For The First Phase of Your Intro to The Market

First Phase Media
April 26, 2021
minute read

Most people have this misconception that market investments are for the rich only. Trust me, that's the only barrier stopping you from putting your money to work.

With so many resources and abundant information available on the internet, investment has become so much easier even for the beginners. And this article is all about getting you started.

Understanding Basic Terms Related To Investments

  • Asset Allocation: The process of dividing your investment portfolio into different asset classes like stocks, bonds, cash etc.
  • Charting: The act of examining the price movements of the assets to predict the future price movement.
  • Index Fund: A type of mutual fund that tracks a certain index or benchmark like S&P 500.
  • Stocks: A security that signifies ownership of a company and represents the most popular type of investment.
  • Mutual Funds: A fund that pools money from different investors and invests the pool into several assets.
  • Volatility: A statistical measure of a risky asset's price variability over time.
  • Liquidity: A measure of how easily an asset can be bought or sold in the market without affecting its price.
  • Quantitative Analysis: A method of evaluating investments using calculations and numbers instead of reading charts to make an investment decision.
  • Risk Management: A practice of controlling and minimizing the risk associated with an investment.
  • Expense Ratio: The fee that an investment fund charges for its management, administration and operating costs.
  • Exchange Traded Funds (ETFs): A type of traded fund that tracks an index, a commodity or bonds.
  • Hedge Fund: A private investment fund that uses complex financial instruments to maximize returns while minimizing risk of loss.
  • Dollar Cost Averaging: Investing a fixed amount of money at regular intervals.

Steps To Get Started

Determine The Best Investment Approach For You

Investing is a very personal decision and there can't be any one-size fits all formula. It totally depends on your financial goals, existing assets and risk tolerance among other factors.

Here are few ways you can opt for:

  • Individual Stocks: If you have a lot of money to invest and are willing to take on more risk.
  • Index Funds: If you want the market returns with less volatility and don't mind higher fees for lower risk.
  • Exchange Traded Funds (ETFs): A good starting point if you are new to investing, a highly liquid and low cost investment instrument that covers a wide range of assets.
  • Mutual Funds: If you want to diversify your portfolio and manage it with a financial advisor's help.
  • Treasury Bonds: Investing for short-term goals with low risk appetite.

Decide How Much You Want To Invest

Investing is all about putting your money to work and it's important to be consistent in doing so. You can make a plan for either weekly, monthly or quarterly investments depending on the availability of funds in your bank account.

Once you've decided how much you want to invest each time, automate this process by linking your checking account with the brokerage account and set up an automatic investment plan.

Choose A Brokerage Account That Suits Your Needs

There are two types of brokerage accounts: commission based and fee-based that differentiates between the trading cost you'll have to incur as well as its convenience.

Commission Based Accounts: If you're working with a limited budget, go for these because you only need to pay when you make a trade.

Fee-Based Accounts: If your investment amounts are more than $5000, it makes sense to go with this option as they charge a flat monthly fee thus saving money on commissions.

Here are some of the best brokerage accounts for beginners:

  1. Robinhood: Comes with a flat no-commission fee and you only need to pay when you make a trade.
  2. Ally: Ally Invest offers no commissions or minimum deposits, making it an attractive option for those looking to execute low-cost transactions.
  3. SoFi: Beginners and long-term investors may discover the most value, particularly those interested in stocks, cryptocurrencies, ETFs, and fractional share purchases.
  4. Merrill: Merrill Edge facilitates $0 stock and ETF trades, strong research offerings, and fantastic customer support. 
  5. Fidelity: Fidelity offers a simple stock trading platform for novices that includes $0 commissions, outstanding research, and a fantastic stock trading experience for beginners.

Choose Your Stocks

Once you've decided how much and on what basis you want to invest, it's time to choose the right investment vehicle. If this is your first time investing in stocks or mutual funds, index funds can be a great starting point. They have low fees and track an entire market which makes them diversified thus minimizing risk of loss.

You can also consider ETFs as they are easy to buy, have low fees and highly liquid on the stock market. Alternatively, you can opt for mutual funds where a professional money manager will invest on your behalf by analyzing different stocks or bonds with appropriate asset allocations based on age, risk appetite etc.

How To Evaluate a Company Before Investing?

In order to make an informed decision, you need to develop a process for evaluating the firm's financial performance. There are several factors that might influence the company's stock price in future including its management team, financial models and corporate strategy.

Good things to consider before investing:

  • The size of the company: Bigger companies tend to be more reliable
  • Innovation: If the company is competing in new lines of business or entering into a new market then its stock price would be more likely to appreciate.
  • Market share: A larger percentage of the total market represents a higher probability of success.
  • Growth prospects: It's important to look at how quickly an industry is growing and what opportunities are available.
  • Income: You should consider the company's profitability when deciding whether to invest in it.

Invest At The Right Time

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." — Warren Buffett

Regardless of how much you make, your money should work for you and this happens when it's invested at the right time. Though market fluctuations are normal but timing them is very difficult thus avoiding the temptation to jump in everytime there's a rally or sell during dips is important.

Keep Investing Consistently

Investing is a marathon and not a sprint. It's all about putting in the effort to reap rewards over time by making smart investment decisions that can get you closer to your financial goals with minimal risk involved.

It takes real discipline and it starts with setting aside money for investing each month or every paycheck before spending on any other expenses. This will keep you motivated to stick with your investment plan and achieve financial independence over time rather than just thinking about it!

Keep Track Of Your Investments

Even though it's not necessary to keep track of your investments, being informed about how much you have earned or lost can help you make better decisions. You can use a spreadsheet or an investment application to keep a track of your investments.

Obviously, we can't include everything there is to know about investment in just a few paragraphs, but here are some best investment rules to live by:

  1. Don't buy what you don't understand
  2. Diversify your investments by investing in a mix of asset classes. This means putting money into stocks, bonds and other securities that behave differently from one another.
  3. Keep an eye on the fees you're paying for your investments.
  4. Don't opt out of a 401(k) or 403(b) plan even if you don't like the investment options that come with it because this could cost you in terms of lower returns and less employer matching dollars.
  5. Avoid high-volatility investments like options, futures and leveraged ETFs. These are best left for experienced investors who know what they're doing.
  6. Invest with your own money, never borrow to invest.

Do These Tips Apply To Crypto Investments As Well?

I'm sorry to say that some don't. Not all cryptocurrencies like Bitcoin and Ethereum provide the same level of returns as compared to traditional markets and not all cryptos will survive in future.

But this doesn't mean we should shy away from cryptos; we just need to be smart with our investments otherwise we can end up losing everything we have gained so far by investing in them about a year ago or today!

We must understand what kind of investment strategy would work for cryptocurrency before jumping on board purely because it's generating huge returns at an unprecedented pace.

So here are three golden rules of crypto investing:

Rule #1: Don't put all your eggs in one basket, diversify your investments in various coins and exchanges.

Rule #2: In the long run, some cryptocurrencies will fail but the very few of them that survive are bound to become some of the biggest names in the business. See the potential.

Rule #3: Remember, the market is volatile and it's very difficult to predict which cryptos will succeed or fail. Do your research well.

In the end, all you need to do is educate yourself on the basics of investing and don't be afraid to take control over your finances. There are plenty of online resources that can help you make informed financial decisions.