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If you want to be a new small investor, this steps will help you during your first investments.
1- Cancel your high interest debt
First, instead of actively invest your savings, you should check if you have outstanding high interest debt, for example, if you have credit card debt. You should first cancel your high interest debt and only after that, look for investment alternatives.
2- Save
Usually, you should not take a loan to make a financial investment. Instead, you should have funds available for investing, which usually come from savings during time.
3- Research
Every investment has an associated risk of loss of capital. Before investing, you should take time to learn and research. You should be able to understand how stock markets work, where to find dependable information and avoid scams. You should know what are dividends, brokers, buy and sell orders, interest rates, etc.
Read books about investments, attend courses and ask friends for information.
4- Choose where to invest
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Low risk
Usually, low risk investments have low performance, but it’s a better alternative than nothing. In a term deposit, your money is not available during a fixed amount of time, which can be months or years. Usually, term deposits interest rates are very low.
An alternative to term deposits are money market funds. A money market fund has a similar interest rate, but you are not tied to a fixed amount of time. It’s worth noting than money market funds are considered a safe investment, but are mutual funds that could eventually lose value and have no principal guarantees.
Stock Mutual Funds
Besides money market funds, there are another types of mutual funds that buy less conservative assets, like stocks. A stock mutual fund is a pool of securities managed by a team of professional specialists and regulated by an authority. There are many types of stock mutual funds, most popular are:
- Funds that try to mirror an index, like the Dow Jones Industrial Average or the S&P 500,
- Try to outperform an index.
- Sector Funds: invest only in an economic sector, like Health, Technology or Industrial; or invest only in an economic geographical region, like Europe or BRIC.
- Etc.
There is another classification of funds: Growth, Value, Blend, Sector, Large Cap, Small Cap and Focused, but it’s out of the scope of this article.
Investing in a stock mutual fund is a good way to diversify investments for small investors, since you have access to a lot of funds but there are relative low capital requirements.
Stocks
Once you have enough information and knowledge, and you are ready to spend additional time on research and trading, buying shares can be another investment alternative. A share represents a part of the capital of a corporation. Before buying a share of a corporation, you should research about this corporation, its financial situation and it’s future perspectives. When the market expects a corporation to have better profits in the future, the price of the share rises, and vice versa. If the price of the share rises, you can sell it and take a profit. Price volatility of shares are usually high, so there is a big probability of capital loss.
To buy shares you can do it through a broker, like Ameritrade, E-trade and Schwab. Usually, you have to open a trading account and you have access to an on-line trading platform, where you can place buy and sell orders.
Advice
Keep track of all your investment trades. It will be useful for tax declaration purposes and to have an overview of your performance.
Don’t let your emotions drive your investments. Trading is not for everyone. Do not attempt to become rich by trading stocks or mutual funds. Take into account that you can lose money, if losing money is not an option, do not invest in assets that can lower it’s price.
