Basic Concepts In Investing For Beginners – Guest Post By John from Stock Market Basics

Today’s guest post is written by John of Stock Market Basics. John approached me about guest posting a little while ago and as you know, I currently don’t have a dime in my bank account set aside for retirement so as soon as I kill off my student loan I’m looking to get back in the investing game – but I know next to nothing about it!  So I jumped at the opportunity to share some very basic info on investing with you (while I visit my family over in europe this week!) Check it out;

Basic Concepts In Investing For Beginners

For most people who are used to a day job as their main and probably only income stream, going into the money-making world of investment can cause them enough anxiety to back out. The idea of investing may fly across their minds once in a while but may never be realized if they are not introduced to the basics of investing for beginners. Just as with any other venture, learning more about investing can  remove the fear of stepping into this great money-making potential.

Investing is not gambling

To remove the fear out of investing, a beginner must not think of it as something similar to gambling. While both activities have a similar primary goal of earning money by putting some principal amount into a money-making machine, gambling is mostly done without thorough analysis of the instrument. Gamblers want to realize gains without knowing how secure their principal is. Furthermore, whenever there is a win, security of return is also in question.

Investing, on the other hand, has the same primary goal of growing money as gambling but after thorough analyses have been made. From these analyses, the security of the principal amount as well as its possible returns is ensured while ascertaining all these will occur within a set period of time. Just like the game of gambling, there is a possible chance of losing referred to as the risks when one goes into serious investment. At the same time, there is also a great chance for winning, which can be analogous to rewards.

Understanding the risk and rewards

One of the key concepts to understand when one steps into the world of investment is the idea of risks and rewards. There are a great number of investment choices an investor can make; thus, investing for beginners can be a tough surface to break without the aid of experienced financial advisers.

Investment choices to a certain extent follow the basic rule, that is, financial instruments with possibility of higher rewards are also accompanied with greater risks. From this rule, investments are classified according to how an investor is willing to take risks. Classifications are, thus, based on instruments with low, medium, and high risks. Of course, low-risk investments equate to higher security for the principal and but have  lower returns. (Andrea; it would be a good idea to sit down with a GOOD financial adviser to discuss your risk tolerance before choosing your investment vehicle)

Where to start

Beginners may start with putting money into low-risk yet low-return investment options like time deposits. (Andrea: term deposit in Canada) Time deposits are offered by most banking institutions throughout the country. You can shop for the best offer a bank can give. In this form of investment, the rule is very simple, that is, the time deposit terms with the highest interest rate per annum is the one most preferred. Of course, other deciding factors like stability of the banking institution as well as the insurance coverage are considered next. (Andrea: check for FDIC/CDIC coverage!)

Once an individual becomes comfortable with a low-risk, low-return investing for beginners, he or she may then begin to build his own investment portfolio. The idea is to diversify the portfolio by venturing into other options that could generate higher returns. You can do so by transforming your best investments from something like CD to a stock which is less risky and is less volatile.

Read and LEARN more

You can depend on the financial analysts and financial planners of your choice however it is better to keep yourself abreast about various things happening in the economy, the stock market and also to understand the principles of investing. There are many great stock market books for beginners. which can be a helpful resource for you to understand the basics and the philosophy of investing. I like One-up on Wall Street by Peter Lynch and Wise Investing Made Simple- by Larry Swedroe. Happy reading and investing !

Great tip in the end there John, imo it’s almost always better to not just hire a good, honest financial adviser but to also dig into this yourself. Be informed!

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20 Comments

  1. I’m saving for retirement, but I’d also like to open a separate investment account in the next few years. My options seem to be (1) learning more about investing or (2) paying someone who already knows about investing. I’m not a fan of option 2 because I despise paying for something I could do myself. But option 1 is totally overwhelming. I have some books; just need to make time to sit down and read them.

  2. I would agree- in some ways investing is like a gamble, but where it differs is that there’s research involve, some intelligence, intuition and consultation. You’re not mesmerized by the flashing lights and a Jack and Coke that makes you feel invincible on the casino room floor (not that I would at all know about any of that…hahaha) I will have to check out those books, but any thoughts on Betterment.com?

  3. wooow, resembling your things ready Basic Concepts In Investing Toward Beginners – Visitor Brand From John from Furnish Place Basics « Nickel Over

  4. This is exactly what I was looking for! I needed some guidance as to how to start investing a this is a great starting point. 🙂 Thanks muchly!

  5. Andrea,

    While I understand taking it slow, why are you waiting until you pay back an entire student loan before starting? The longer you wait the worse position you are likely to be in.

    GET STARTED, even if it is 25 bucks a month now…the excuse to wait till some future event will always be there.

    • It’s not an excuse, I want to know MORE about what I am going to invest in before I do so again. I plan to spend the next few months actually learning something before paying someone to figure it out for me. Knowledge=power. I have held mutual funds before for a few years, my parents set it up and I never learned anything from it, I want to do it differently this time and I’ve chosen the point where I pay off my student loan as the time to get back in the game, it’s only MORE motivation for me go get the stupid thing paid off!

  6. I like your point about knowing risks and rewards. This is actually a good motto live by not just invest by. Knowing how you actions will benefit you and pose you problems is a great way to determine what decision to make. Far to often, people act impulsively and don’t consider the two roads a situation can take.

  7. There’s so much to consider when investing, thanks for pointing all of this out. Volatility is your friend!

  8. I think of investing as gambling 🙂 except if you make educated moves you can improve your odds by leaps and bounds. I like your point on risk and rewards, people should really know their risk tolerance before investing.

  9. Thanks for breaking this down. It’s really helpful!

  10. I am adding these books to my list! I am definitely on the beginner side and feel like I am going to miss out if I don’t start learning now. Thanks for the information.

  11. Great post, I cherrish playing a hand of holdem.

  12. Great points! I agree it’s best to become informed so you can make your own decisions. There are many good books on investing out there.

  13. Investing definitely should NOT be like gambling, but some people treat it that way. It’s good to be informed instead!

  14. For me, investing is NOT gambling because we there are more rewards and gains than losses. There are risks, yes, but the risks can be avoided or minimized if we keep ourselves informed.

  15. I first started investing in 2006 with a target retirement fund. Now I’ve added some funds as my portfolio has grown, so I’ve become much less clear about what stocks are actually make up my retirement fund. I actually recently wrote a post on this… even if you don’t know anything about investing, it’s not a bad idea to just stick money into a target retirement fund. You will get your basic asset allocation taken care of and you will have started investing. Which, in my humble non-expert opinion, is the two most important things you can do.

    http://www.wellheeledblog.com/2011/09/19/whats-in-your-investment-portfolio/

  16. Nice Blog Buddy. Thanks for this

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