“An investment in knowledge pays the best interest. When it comes to investing, nothing will pay off more than
educating yourself. Do the necessary research, study and analysis before making any investment decisions.”
— Benjamin Franklin
Before starting to invest, everyone has the question “How to Start Investing”. The purpose of today’s writing is to solve your question.
Investing is putting your resources into something with the expectation of generating an profit. For Investing you need to do a lot of research. Market trends need to be analyzed. With the amount of money you are going to invest, you have to analyze whether the return will come as per your expectation. You need to analyze whether the sector you are going to invest in is more risky for you.
You also have to think about how long you will invest because the investment strategy for the short term is one way and the investment strategy for the long term is another. For example, when investing in a short period of time, the purpose of traders is to make quick profit and in the long run, the purpose of those who invest is first to maximize wealth and then to make a profit.
How to Start Investing?
There are 5 simple steps to start investing –
- Decide how much you can invest
- Decide on the duration of the investment
- Determine Your Risk Tolerance
- Pick your investment options
- Choose your investment strategy
Decide how much you can invest
The first step in investing is to figure out how much you can invest. You can start investing with $100 or you can start with $1000 if you want. Remember that money brings money. The more you invest, the higher your income will be. Giving a little example will make the issue clear.
Suppose you bought a stock for $10 today and you can earn $1 tomorrow if it increases by 10% for any reason. If you could buy $100 worth of stocks instead of $10, you could make $10.
If you are a beginner, it is best not to invest too much. Invest little by little. Then, if there is a profit, invest again by adding a part of that profit to the principal amount. Thus gradually increase the amount of your capital.
Related Article – How to Start Investing with Little Money (Beginners Guide)
Decide on the duration of the investment
Short term investment is 1 to 5 years investment. Some people call investing up to 3 years as short term investment. In the short term you can invest in short-term bonds, treasury bills, and other money market funds.
The advantage of investing in the short term is that you don’t have to wait too long to make a profit.
The disadvantage of short term investments is high costs due to a high transaction volume and short term investments have high brokerage commission. Taxes and inflation can lower your income.
Suppose you invest in securities for three years or deposited money in a bank for three years as savings. Most banks offer less than 1% interest. Suppose you are getting interest at the rate of 1% or you are getting a 1% return from securities. Now if the amount of inflation is more than 1 percent, you will lose more than you gain.
So if you want to make money from short term investments, you need to invest in a project where you can get high returns with less risk.
Generally, investing for more than 5 years is termed as long term investment. Although it takes a little longer to get a return on a long-term investment, it is relatively less risky.
I am talking about an incident that will help you to understand. The stock market crashed in October 1987. On October 19 of that year, the Dow Jones Industrial Average lost more than 22%. Many said goodbye to the stock market out of fear. But those who kept their investments earned 16.6% in 1988 and 31.7% in 1989.
You can invest in long term Employer retirement accounts. Some Employer retirement accounts are 401 (k), 403 (b), and 457 (b) accounts depending on where you are working. There are also non-employer retirement accounts known as IRAs (individual retirement accounts). There are several types of IRA such as – Traditional IRA, Roth IRA, SEP-IRA etc. Of these, investing in Roth IRA is more profitable because it is completely tax free.
Related Article – How to Invest $500 – 11 Ways to Make it Grow
Determine Your Risk Tolerance
You need to understand how much risk you can take. There is a correlation between risk and profit. The higher the risk on investment, the higher the return. The lower the risk on investment, the lower the return.
For example, if you invest in U.S. Treasury Securities or AAA-rated corporate bonds, you will get little profit but the risk is very low. Again, if you invest in stocks, your return will be higher and your risk will also be higher.
If you keep money in savings account, it represents an even lower risk and your profit will be less. On the other hand, if you invest in a high-yield bond, you can earn more, but it has greater risk of default. Then you understand that where there is more risk, there is more profit.
Pick your investment options
At this stage you need to choose where to invest. There are many investment options where you can invest.
- 401(k) plan
- Traditional or Roth IRA
- Mutual funds
- Exchange-traded funds
You can invest in a 401 (k) plan to make a good living after retirement. You have to contribute a part of your income in this fund. According to a 2019 report by the American Benefits Council, 80 million workers took part in 401(k). You will get tax advantage here. You can deduct 401(k) contributions from the tax return for the year you contribute to 401(k). This will reduce the amount of your tax that year.
401(k) also gives Shelter from creditors. In addition, many times the employer makes some contribution to this fund which increases the amount of your money.
Traditional or Roth IRA
Here your contribution is not tax free but it will be tax free when you start withdrawing money. On the other hand, you do not have to pay tax when you contribute to traditional IRA but you have to pay tax on it when you start withdrawing money. Choosing Roth IRA from Traditional IRA will be much better for you.
The amount of tax may increase in the future so it would be better to pay the tax now. Those who earn too much cannot save money in Roth IRA. In 2021, the income limit for single person is $140,000 and for married couple it is $208,000.
The longer you deposit, the more your account will grow. However, there is a penalty for withdrawing money before the deadline.
Investing in stocks is always risky and profitable than less volatile asset classes. However, investing in stocks is relatively expensive. It is profitable for you to invest in a bull market. As a beginner you must know what is Bull market and Bear Market. Because at this time the stock price continues to rise. But you should not buy overvalued shares. Overvalued shares can fall at any time. And when the stock market goes through crisis, it is better not to invest.
Check the financial condition of the company from which you will buy the shares. Before investing you must know how to invest in the stock market and then invest.
Bond is a debt instrument through which company or government entity collects funds from the creditors and they agree to pay you back in a certain number of years. Your profit is that as long as you have the bond you will get interest in return.
Investing in bonds is less risky than stocks. By investing in bonds you will know exactly how much you can earn. If you buy government bonds, you will get relatively low rate of interest but have the lowest possible risk of default.
And even if the risk of default is higher in the bonds of private companies, you will get more interest.
Since profits are higher in stocks and lower in bonds, you can invest in a mix of stocks and bonds. This will reduce your risk and increase your profits. Investing in stocks and bonds mix helps diversify your investment portfolio, and mitigate its overall volatility.
A mutual fund is a mix of investments vehicle consisting of a portfolio of stocks, bonds, or other securities.
Since mutual funds have stocks, bonds and other money market instruments together, so investing in mutual fund is less risky. For example, if you invest $100 in a mutual fund that means you are not investing in one company, your investment will goes to several companies together which will reduce your risk. Mutual funds are managed by professional fund managers so you don’t have to do anything.
An exchange traded fund is a collection of securities that trade throughout the day like a stock. But mutual funds are traded only once a day. This is the difference between mutual funds and exchange-traded funds.
Like mutual funds, Exchange-traded funds also contain many stocks, bonds and other securities together. Investing in ETFs funds is less expensive than mutual funds. ETFs offer lower share prices and brokers also take lower commissions. So those who want to invest a small amount can invest here.
Choose your investment strategy
When you initiate investing you will have many options in front of you but you should pick any one. First of all, if you want to invest in many options at once, you will not be able to adjust.
Your investment strategy will depend on how much money you want to earn in how long. The right investment strategy will make your investment sustainable and help you make a reasonable profit.
To make a good profit from investment, you should invest in areas where tax benefits are available. Therefore, it is best to invest in 401 (K) s and IRAs (individual retirement accounts). The amount of money you contribute to these accounts will be deducted from tax. For example, if you earned $120,000 in 2020, of which $20,000 was contributed to these accounts, then this year you will have to pay tax on only $100,000. $20,000 will be deducted from tax return. But you have to pay taxes when you withdraw money.
It should not be too late if you decide to invest. Because the earlier you invest, the more your income will increase. Suppose this year you initially invested $10,000 at a rate of 3% per year compounded. Your monthly payment is $1,000. Your length of time in Years is 10 years. Then you will get $ 151,005.72 after 10 years. Now if you did next year without investing this year you would be 1 year behind. Again, if you had invested more, your income would have been much higher.
You can use the investment apps if you have little idea about investing. Robo-advisors will help you to invest in stocks and look after your investment portfolio. These investment apps will give you the opportunity to invest a small amount.
It is better to invest in savings account, certificate of deposit account or low-risk investment portfolio to earn short term investment.
And if you want to invest in the long run, stocks and bonds are the best option. Investing in the long run will greatly reduce your risk and boost your profits.
Investing is a way to maximize profits and assets. With investing your financial crisis will be reduced and You can join the ranks of the rich. However, the investment must be as planned.
After reading this article today, I hope you have a good idea of how to start investing. So before we end, let’s take a look at the steps to start investing –
- Decide how much you can invest,
- Decide whether you want to invest in the short term or the long term,
- Determine Your Risk Tolerance
- Pick your investment options,
- Choose your investment strategy.