You may have heard the old, Chinese curse that states “May you live in interesting times.” For investors it seems that this curse has come to pass. Market volatility is through the roof, with the stock market swinging wildly up and down like some sick carnival ride, and taking investors with it every day .
What do you do if you are a beginning investor; still brand new to the world of finance and investing ? Over 50% of Americans polled in recent survey, think that their best chance for financial security is to stumble on a list of the most picked winning lottery numbers. This beginner’s guide to investing can give you some of the information you need to invest your money successfully.
Goals
If you are just getting started in your investing journey, much as with many other of life’s endeavors, the first thing you’ll need to do is make a plan. The plan will answer a few questions so you can achieve your goals. In fact, that is the first question you must answer. What are your investing goals? Are you trying to stash away a retirement nest egg, saving for the kid’s college education, or stashing a little away, just in case? How much money will you need?
When Will You Need Your Money?
What is the time horizon for your investment strategy? In other words, when will you need the money? You’ll have a different strategy if you’re in your 50′s and nearing retirement, than if you’re fresh out of college and have 40 years of work ahead of you.
Risk Tolerance
How risk averse are you? If you’re the type that abhors risk, there are certain investments that are just not for you. In general, riskier investments will give you a higher rate of return, at a cost of possibly losing a good portion of your growth, or even your principle. You’ll want to structure your investment portfolio to take into account your personal taste for risk.
Income or Growth
Are you investing for income? If you are looking for your investments to provide you with a long term income, with regular payments you can use to live on, you’ll need to structure your portfolio accordingly. You will want instruments that pay you regularly. Stocks that have a good history of paying a regular, quarterly dividend would be one such instrument. Bonds would be another way to receive a regular income stream that one could use to live on. In most cases it is prudent to keep risk to a minimum if you’re investing for income. If you are truly counting on those investments to provide your income into the future, you could find yourself back to work in short order if a problem were to decrease the value of your holdings .
Many people invest for growth. This tends to be a riskier strategy, but for younger people who have plenty of time before they need their money, this is less of a concern. If you’re trying to amass as large a nest egg as possible than you’d want to target maximum growth, remember that you’re but one market fluctuation from disaster .
Don’t Put All Your Eggs in One Basket – Diversify and Live to Invest Another Day 
Most investment experts recomend a sound diversification strategy. Diversification is a process of acquiring different investments that are each affected differently by economic factors. For example transportation stockks will be highly affected by fuel prices, while high tecfh investments will be less affected by them. This strategy looks to reduce your risk exposure and maximize return by allocating a mix of investment vehicles, each with different risk exposures. In addition a well diversified portfolio uses instruments that are exposed to risk from different areas.
For example, you might have some shares in blue chip companies (large, well established, historically strong) in various sectors, such as transportation, mining, consumer goods, and tech stocks. You could then mix those blue chip holdings with some small cap (smaller, younger companies whose market capitalization, or the total value of all their stock, is between $300 million and $2 billion) stocks to round out your portfolio.
The whole point of diversification is to protect your assets by helping to ensure that no one economic or local problem can drastically affect all your holdings. That is why a well diversified portfolio has different companies from different industries.
Stocks vs. Bonds When most people think of investing, stocks are the first thing that spring to mind. A share of stock is simply a piece of the company. You are actually a part owner of the firm, and you own more of the company for each share that you buy. You’ll share (no pun intended) in the fortunes of the company as it grows and becomes more profitable. Many companies also pay out portions of their profits every year or quarter in payments to shareholders called dividends. You can reinvest these dividends in more of the company’s shares, or keep the funds for other purposes. Companies typically sell shares of themselves to raise money so they can finance growth.
Whereas stocks are ownership in a company, bonds are basically loaning a company money in exchange for being repaid your money with interest ,over time. They are shares of company debt. . Basically, a company that needs an infusion of cash borrows the money from investors by selling them bonds. The bonds are then repaid over a specific time period. These bonds are traded like stocks. It is often the case that stocks and bonds perform inversely with respect to each other. That means when one increases, the other declines. .
Municipal Bonds
Certain kinds of bonds are the financial instruments used by local government entities to bring in money for public projects like highways, bridges, schools, parks and libraries . These spcial bonds are called municipal bonds. They often have lower rates of return than corporate bonds, but their proceeds are normally tax free, and they are often lower risk than corporate, although there have been instances where cities have defaulted on their bond obligations .
Where to Trade Stocks and Bonds
Stocks are traded in places called stock exchanges . These can be an actual building full of people making trades, or they can be a virtual exchange that exists purely in the computer world. The New York Stock Exchange is an example of a physical stock exchange, whereas the NASDAQ is a virtual exchange. The trades made in both are just as real and you’ll find examples of solid companies on both exchanges.
One of the most exciting things to come down the pike for the individual investor is the rise of online discount stock brokers. This allows the average person to become a very hands on investor at previously unheard of prices. In the past, all stock trades had to be done through a full service broker, which charged a pretty penny for their services. They often earned their money, because they had access to all the important information that was required to make good stock trades. Now, however most of that information is at the fingertips of anyone with a computer, so people can make their own, well informed investment decisions.
One thing investment experts and financial professionals are in universal agreement about is the need to start investing early. You will reap far greater benefits by starting early than if you wair even a few years, and you may never be able to catch where you would have been, all due to the power of compound interest you harness by giving your investments more time to grow. Compounding harnesses investment gains and reinvests them. The power of compounding means that an investor who starts early and invests wisely is almost assured of amassing a very large nest egg . Starting early is the key to an enjoyable retirement. So go out there and get started. Your future depends on it. Your other choice is to hit the lucky lotto numbers, and the odds there just aren’t that good.
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