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!