A Beginner’s Guide to Investing

People everywhere spend an inordinate amount of time thinking about what to do with their money. Those practicing good financial management may think about how to properly budget their money so they can make it to the end of the month without going into debt while others pinch pennies so they can put some money into savings while others are strategizing on how to make more money. With others, they spend their time thinking about what to spend their money on and how nice it would be to turn that money into more money.

It seems logical that those in possession of more money would spend less time thinking about what to do with it. Sure, there is more to manage, but the rich and famous don’t have to worry about paying their electricity bill or keeping food on the table, right? Money should be more of an afterthought. Of course in reality, it’s quite the opposite.

The millionaires and billionaires of the world really spend as much time — if not more — thinking about money as anyone else. Time they could probably be spending enjoying their plush lifestyle — but that’s besides the point.

The point is that these millionaires and billionaires spend so much of their daily lives thinking about their money, not because they’re greedy — or not just because they’re greedy — but because they likely have millions tied up in a variety of investments. And investing is a complicated and time consuming practice.

You don’t need to be in the 1 percent to invest, though. As long as you are financially comfortable and have a bit of a savings account, you too can start investing for your future. Following this guide, you can even teach teens to invest.

Before you get started, there are several investing basics you want to have a mastery of. Some of these things you have heard variations of your whole life. Others will be relatively new or even counterintuitive. We’ll start with a familiar one.

Buy Low, Sell High

This is a phrase that has been appropriated into a number of other contexts, so you’ve likely heard it before. But before you start putting your money in the market you should make sure you fully understand what it means when it comes to investing.

The way you make the greatest profit with your investments is to buy in stocks, or other assets, and then sell them once the price is seeming to peak. This happens when you buy into a stock that is undervalued, and sell once the value is realized.

A common way to identify an undervalued stock is the P/E ratio, short for price to earnings ratio. It’s the ratio of what the company is trading shares at versus what the earnings from each share are. Stocks sporting a lower price to earnings ratio are more likely undervalued.

P/E ratio is a one-stop-shop as far as signifiers go, but in order to truly identify an undervalued stock, you must conduct in-depth research on it, including identify its competition, and predicting how the company will do in its specific market.

Don’t Let Emotion Affect Your Investments

Investing is not a feelings-based game. Investing is about cold, hard logic based on statistical evidence. Don’t let your worries that a stock will crash or your blind hope that a stock will succeed affect your decision, unless it is backed by legitimate evidence. You should always have a collaborator, whether it be a broker or a business partner, to help keep your emotions in check.

Diversify Your Portfolio

Once you get a hold on the basics of investing, you will hopefully start to find some success. You will have certain types of stocks that are earning you money right away, but don’t become attached to the type of investments that succeed early on.

Asset allocation is the key to successful long-term investing. Your portfolio needs to feature a wide range of assets, from low cap stocks to high cap stocks, from business investment to property investment. This way, when one category of assets is on a downturn, another will be thriving.

Shorting a Stock

Selling a stock short is a bold way to put yourself ahead of your competition. When you have a stock that is steadily rising, you will obviously be inclined to hold on it. Selling short is the concept of predicting that a growing stock is going to suddenly and abruptly drop, and selling it to maximize your value. This is loaded with risk, but could leave your portfolio much improved.

Now that you understand some investment basics, you’re ready to get started and put some cold, hard cash into the market.  But how, exactly, does one do that?

Pick Your Brokerage Firm

Your first step will be to decide where you want your investments to be managed. Do your research on popular or referred stock brokerage firms, including interviewing potential portfolio managers.  Know that every firm will differ in their policies, which will include fees, minimum initial investment, and account minimums. Ask detailed questions about risk tolerance, strategy, research capabilities, frequencies of portfolio reviews and rebalancing, and past performance to make sure your investment philosophies are aligned.

After finding a firm and broker that you feel most comfortable with open an account and get started.

Get a Roth IRA and a 401(k)

Assuming you are in a position where you are making a healthy amount of regular income, you should be putting money into a Roth IRA and a 401(k) as soon as possible. These are two accounts that will protect and grow your money in order to help you prepare for your retirement. A Roth IRA is an account you would open personally, whereas a 401(k) is a retirement savings fund managed by your employer.

Invest in Mutual Funds

Mutual funds are an easy way to get started in investing because they are a large group of securities which are curated and managed by someone else. Mutual funds come with a variety of costs which varies with each fund. The most expensive funds will be ones that are actively managed, but these are the most likely to find you success as well.

Hire a Financial Adviser

No matter how hard you work to educate yourself on the world of investing, there will always be people who know more. Luckily, some of these people are financial advisers, and their job is not to compete with you, but to help you better invest and succeed in the stock market.