Contrary to what most people think, you don't need to be a millionaire already to invest. Investing your money wisely is one of the best ways to ensure your well-being and become financially independent. The investment strategy of constantly investing small amounts of money is commonly referred to as the "snowball effect" or "snowball effect". The name is due to the fact that a small initial investment, with the passage of time and thanks to the earnings obtained, will increase its size, generating an exponential growth in assets. To be able to do this, you need to implement an appropriate investment strategy as well as being patient, disciplined and diligent. These simple instructions will help you to invest small amounts of money intelligently.
Steps
Part 1 of 4: Prepare to Invest
Step 1. Make sure the investing world is right for you
Investing money (especially in the stock market) involves risk, which includes the possibility of losing your money permanently. Before committing to this business you need to be sure that you always have an amount of savings that will allow you to live normally in the event of a job loss or a catastrophic event.
- Make sure you have 3-6 months of your current working income in a liquid deposit account that is always available. This will ensure that you can meet any pressing economic needs, without having to divest your shares. Even the safest stocks are subject to marked price fluctuations over time. There is therefore the possibility that, when you need liquidity, your shares are at a loss, that is, they have a lower price than when you bought them.
- Guarantee all the basic needs. Before investing a part of your monthly income, make sure that your basic needs and those of your family are met and guaranteed (insure all your assets against all eventualities, take out life insurance, make sure you can easily pay any mortgage etc.).
- Remember that you will never have to depend on your investments to meet any sudden expenses, precisely because investments, over time, are subject to even substantial fluctuations in value. For example, if you invested your savings in the stock market in 2008 and had to suspend your employment for 6 months due to illness, you would have been forced to sell your shares at a potential loss of 50% due to the crisis. market. By having an appropriate amount of savings and an insurance policy, you could have dealt with sickness and the time of great market volatility without too much trouble.
Step 2. Choose the right type of investment
This step depends on the financial goals you want to achieve. The possibilities that you can evaluate are many, and each represents a means on which to make your investments travel. Thanks to this article you will be able to evaluate ideas that adapt to the needs of different investors, from those who have only 5 euros to those who have a more substantial nest egg. Before making a final decision, use your time to gather more information about the investment options you have available.
Step 3. Try to keep yourself informed and to study, but at the same time let yourself be guided by an expert, such as a consultant or a friend
In any case, always remember that investing is not a certain science, so no one has a crystal ball, not even the most renowned economists in the world.
Part 2 of 4: Postal and Banking Solutions
Step 1. Consider a postal savings book, an investment solution offered by Poste Italiane
It is an advantageous method because it guarantees transparency and security. Plus, there's no additional cost, so you won't have to pay to open, manage, or possibly close it. The only charges are those of a fiscal nature. These costs are fixed, with a tax of 26% applied to interest and a stamp duty of € 34.20 (for individuals). You can open it in a post office by presenting an identity document and the tax code. It has some disadvantages, including the impossibility of using it as if it were a current account, but otherwise it is an ideal solution for those who want to invest low amounts in complete safety. Currently there are 5 types of booklets:
- Smart booklet, with a gross yield of 0.05% per annum. It can also be managed online.
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Ordinary booklet, with a gross yield of 0.03% per annum.
To the Smart Booklet and to the Ordinary Booklet it is possible to associate the Postal Booklet Card, a card that allows you to make withdrawals and deposits
- Booklet for minors, in turn divided according to 3 age groups. It has a gross yield of 0.03% per annum.
- Bearer passbook, which is exclusively made out to the person requesting its opening. It has a gross yield of 0.03% per annum.
- Judicial booklet, which allows you to receive sums of money resulting from legal proceedings. It has a gross yield of 0.03% per annum.
Step 2. Consider postal savings bonds
It is an investment suitable for anyone who is not familiar with the world of finance, it is also safe and allows you to diversify your portfolio. You can sign it up at any post office, in some cases even online. There are no commissions or other costs, except tax charges. There are two types:
- Postal savings bonds dedicated to minors. They always allow you to receive 100% of the money that has been invested and the interest accrued up to the recipient's eighteenth year of age. They have a fixed return.
- Ordinary postal savings bonds. They allow you to invest for the long term, but you can withdraw the money invested and the related interest at any time. They have an increasing fixed return.
Step 3. Consider a deposit account, which is a kind of "piggy bank", ie it allows you to deposit money in the bank and receive remuneration
It can be free (the money is available immediately) or tied (the money will be available only when the stipulated bond expires). It is considered a profitable, safe, easy to open and manage medium.
For example, you could open a Widiba deposit account, which can be a free line (provides for a profit on savings equal to 0.25%) or a fixed line (the profit varies according to the defined duration). There is no activation fee or annual fee
Step 4. Consider a supplementary pension, a supplementary pension plan which, as the term implies, serves precisely to supplement the pension
It allows you to build a monthly income for both employees and self-employed workers. The supplementary pension is based on a very simple assumption: since the prospects from an economic point of view are not rosy today, it is possible to decide to regularly set aside savings during the course of one's life in order to increase the amount of money that it will be perceived once you retire. In this regard, it is advisable to be far-sighted and start saving money from an early age, just when you are embarking on a working career. Several institutes make this investment available, including Poste Italiane.
Postaprevidenza Valore, that is the supplementary pension plan of Poste Italiane, allows you to pay minimum investments of 50 euros per month. Just remember that it is a product reserved for holders of an account or a postal passbook
Part 3 of 4: Online Trading and Securities
Step 1. Evaluate your investment options
As stated previously, the options you have available to invest your money are many. This section focuses on online trading and the stock market, so find out the main ways to invest in these fields:
Online Trading
Step 1. Consider online trading
This activity consists of making small investments throughout the day. Unfortunately it is a source of distrust, in fact many fear being scammed by unreliable brokers or platforms. It actually offers excellent investment opportunities, as long as you make proper use of it. For the investment to be successful, the following conditions must be met: find a good trading platform and find a good broker or intermediary.
- Some of the most used trading platforms in Italy are Plus500 and 24Option. Whatever platform you decide to use, make sure before it is recognized by Consob or regulated by another European body. At this point you can begin to monitor the markets that interest you and invest accordingly.
- To avoid having problems, first find out about the platform you would like to try, the brokers and the most effective tactics for investing. Since you intend to invest small amounts, choose a broker who requires little or no initial amount of money. In principle, you should start with 100 euros.
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The 24Option platform specializes in binary options, which is a financial option in which the exact amount of money that will eventually be gained or lost by the investor is known from the beginning of the operation. Compared to other investment methods, binary options are quite risky. If in doubt, consult a financial advisor.
Binary options allow you to invest in assets called assets, roughly divided into three categories: commodities, stocks and currency pairs. After choosing the asset to bet on, the trend (i.e. whether it will go up or down) and the amount to invest, you can follow the trend through the graphs made available by the platform
Equity and Bond Securities
Step 1. Consider government bonds, which are bonds issued by the government to finance public debt
For such an investment, an initial amount of at least 1000 euros is required. The main securities issued by the state are three (BOTs, CCTs and BTPs) and they are considered advantageous above all because the earnings received by the investors are taxed in a facilitated manner. You can buy them by submitting an application to your bank or broker when they are placed on the market. If a security is already listed, it can be purchased at the current price, resulting from the meeting between supply and demand. The risk factor is closely linked to the duration of the security: the further the maturity is, the more the risk increases. Obviously, if a stock has a longer duration, the return will be greater.
Step 2. Consider investing in an Exchange Traded Fund (ETF)
Exchange Traded Funds are indexed investment funds that are based on a passive portfolio made up of stocks and / or bonds specifically selected to achieve the financial objectives set. Often the goal of these funds is to track the performance of the index they refer to (such as the S&P 500 or NASDAQ). For example, when you buy an ETF linked to the S&P 500 market index, you are actually buying the shares of 500 different stocks, which guarantees a very broad diversification. One of the advantages of ETFs is that they have very low commissions, precisely because the management of this type of funds is passive and involves a minimum number of operations per year by the manager. The customer therefore does not have to pay large commissions to be able to use the service.
Step 3. Consider investing in an actively managed mutual fund
These types of funds collect the liquidity of a group of investors and use them to buy a set of equities or bonds, always with a view to achieving pre-established profit objectives or following a specific investment strategy. One of the benefits of mutual funds is given by the professional management of assets. These funds are managed by professional investors who invest the fund assets by diversifying them and adapting them to the dynamic market trend. This is the key difference between mutual funds and ETFs: the former are managed by professional investors who buy or sell certain securities or bonds to achieve their predetermined profit targets, while ETFs are passively managed since they refer to a market index. The downside of mutual funds is the higher fees, which is a consequence of the managers' work being rewarded.
Step 4. Consider investing in individual stocks
If you have the time, knowledge, passion and desire to research the right stocks, the return on your job can be very high. Remember that in this case your portfolio will not be highly diversified, as it would be if you buy a mutual fund or ETF, therefore the risk will be greater. To reduce risk, try not to invest more than 20% of your money in a single stock. This way you will be able to reap some of the benefit that diversification provides, as is the case with mutual funds and ETFs.
Step 5. Implement an "Accumulation Plan"
Although it may seem a complex concept, it is simply a matter of investing the same amount of money each month, with the result that the average purchase price, over time, tends to exactly reflect the average price of the shares in question. This investment strategy reduces the risk since investing small amounts of money at regular time intervals decreases the chances of entering the market just before a strong contraction (eliminating the problem of so-called "market timing", that is the choice of the ideal moment to invest). This is the main reason why you should implement an accumulation plan on a monthly basis. Another benefit is that this technique reduces costs, since if the price of the security in question shows a temporary decline, you can take advantage of it by buying more shares at a lower price.
- When you invest money in the stock market, you buy a number of shares at a certain price. For example, if you can invest € 500 per month and the stock you are interested in costs € 5 per share, you can afford to buy 100.
- By investing the same amount of money (for example € 500) in the same share at regular intervals, you can lower the purchase price of each individual share. That way, when the stock's value goes up, your earnings will be greater.
- This strategy works because when the stock experiences a temporary decline in its value, the monthly investment of € 500 gives access to a greater number of shares; on the contrary, when the stock price rises, the € 500 guarantees a smaller number of shares. As a final result, an average purchase price is obtained which decreases over time.
- It is important to note, however, that the reverse is also true. If the price of the security in question continues to rise steadily, the fixed investment will give access to fewer and fewer shares, thus causing the average purchase price to rise over time. However, the value of your shares will also go up over time, so you will continue to make a profit. The key to success is being disciplined and continuing to invest on a regular basis, regardless of the stock price, without trying to catch the perfect time to enter the market.
- At the same time, investing a small amount of money on a regular basis will protect you from an unpredictable market downturn, thus reducing risk.
Step 6. Consider compounding
This essential concept of the investment world refers to the scenario in which a stock (or any other asset or asset) generates a gain by reinvesting the gains already made.
- This concept is best explained through a concrete example. Let's assume that we have invested € 1000 in shares in one year and that the chosen stock has paid a dividend of 5%. At the end of the year the value of the shares will be € 1050. At the end of the second year, the stock pays a dividend identical to the first year equal to 5%. The substantial difference, however, is given by the invested capital, which in the first year was € 1000, but which in the second year grew to € 1050. As a result we will have an interest of € 52.50 instead of the € 50 of the first year.
- It can be easily understood that such a mechanism can produce enormous growth in invested capital. If we invest € 1000 in an account that generates an annual income of 5%, after 40 years it will have reached more than € 7000. If we assume the scenario in which every year we contribute with an additional € 1000, after 40 years we will have obtained the considerable sum of € 133,000. If you plan to invest € 500 a month for two years, after 40 years you will have assets that will approach € 800,000.
- Remember that this is just one example of a scenario where the share price and interest generated by dividends remain constant over time. In reality, things are a bit different and above all unpredictable, since the value of a security can go up but it can also go down, so after 40 years the total value of the assets could be greater or less than that shown in the example.
Step 7. Avoid focusing on a few stocks
The concept behind a good investment is to diversify the stocks in your portfolio. Never initially concentrate all of your assets in a single stock, instead try to distribute it in different stocks.
- Buying only a single stock exposes you to the risk of losing a significant portion of your assets due to a potential collapse in the value of the stock. Conversely, by investing in many different securities, this risk is significantly reduced.
- For example, if the price of oil goes down a lot, and the related shares you invested in lose 20% in value, it is very likely that the shares in your portfolio of companies focused on retail will increase in value. precisely because people will have more money available for their purchases (given that the price of oil and therefore of its derivatives has dropped). However, your tech-related stocks may not be affected by this scenario. As a final result, the total value of your portfolio will still decline, albeit not too high.
- A good way to diversify is to invest in a financial product designed and built to be diversified. These products include mutual funds or ETFs. Given the diverse nature of these products, both are a great starting point for a newbie to the investment world.
Step 8. Find a broker or mutual fund management company that meets your needs
Take advantage of the services provided by a broker or mutual fund management company that makes investments on your behalf. You will need to focus your attention on both the cost and the actual value of that service.
- For example, there are types of accounts that allow you to deposit liquidity and make an investment at a very low commission rate. These accounts are perfect for those who already know how to invest their money.
- If you need professional investment advice, be prepared to pay higher fees associated with such a service.
- Nowadays, many brokerage firms offer their services at very cheap prices, so it shouldn't be difficult to find one that can satisfy your needs by offering a limited commission fee.
- Each broker has its own pricing plan. Pay close attention to the details and costs of the products you think you want to use most often.
Step 9. Open an account
To do this you will need to enter your personal information in a form that will be used to execute your market orders and to fulfill the obligations of current taxation. The next step is to transfer the liquidity you have decided to reserve for your investments to the new account.
Focus on the Future
Step 1. Be patient
The biggest obstacle preventing investors from seeing the effects of compounding is impatience. It is certainly very difficult to remain impassive to observe your small assets that grow very slowly or that, in some cases, lose some of their value in the short term.
Try to remind yourself that your investments are planned for the long term. So, if there are no immediate profits, don't take it as a sign of failure. For example, if you bought a stock, you should expect to see it fluctuate in profit and loss early on. Often the value of a stock drops slightly before it rises. Always remember that you have not bought a piece of paper, but a percentage of a real company, so just as you would not feel discouraged if the value of the gas station you purchased were to decline over the span of a week or a month. Similarly, you shouldn't be discouraged by seeing the value of your shares fluctuate between profit and loss. To determine if a company is a good investment, focus on the gains it has materialized over time as the value of its shares will reflect that trend
Step 2. Be consistent
Focus on being consistent in your investments. Keep investing in your personal fund as often and as much money as you planned before starting, then let your assets grow slowly.
You should get excited about the low prices! A strategy that involves the use of an accumulation plan on a monthly basis is a real and tested method to create well-being over time. Furthermore, consider that the more affordable a stock is today, the higher the growth expectations will be for the future
Step 3. Stay informed, but focus on the future
Nowadays, with current technology, it is possible to find the information you need in a few moments. Being able to observe the numerous fluctuations in the value of your portfolio complicates the planning of a long-term investment. Only investors who are able to put the advice given into practice will therefore see their assets grow, at first slowly and then gradually increase until they reach their economic objectives.
Step 4. Continue all the way through
When it comes to compounding interest, the second major obstacle is resisting the temptation to change your investment strategy, cashing in a large unexpected gain obtained in a short time or, conversely, selling your shares in a decline in their value followed. Such behavior is the polar opposite of what is adopted by most successful investors.
- In other words, don't chase the easy money. Investments that produce very high earnings can only reverse their trend and tend to normalize their value, revealing themselves to be mere speculations. Investing in stocks just to chase a quick payoff is often a disastrous strategy. Stay consistent with your original plan, as long as it has been designed and structured for a long-term investment.
- Apply your investment strategy and stay consistent with your long-term plan. Don't keep going in and out of the market (buying and selling stocks). The historical trend of the stock market clearly shows that not being on the market in the 4-5 days of the year when the big rises in the price occur means losing rather than gaining. Of course, until they occur, no one can predict such hikes.
- Don't try to find the perfect time to enter or exit the market. For example, you may be tempted to sell your shares on a premonition that their price may fall. Conversely, you may decide not to invest in a certain asset because you think the economy is about to enter a period of recession. Research has shown that the most profitable and effective approach is simply to invest regularly and consistently following the pre-established savings plan.
- Some studies have found that people who simply follow a monthly accumulation plan without redeeming their assets, obtain better results than those investors who try to follow the market trend assiduously, invest the total sum of money at the beginning of each year. money reserved for your portfolio or that does not invest in the stock market.
Part 4 of 4: Alternative Investments
Step 1. Consider an alternative investment in real estate
Have you ever heard of the one euro houses initiative? For some years now, several Italian municipalities have been selling off homes at a symbolic cost, primarily to tackle the problem of depopulation, which afflicts many countries. However, it is necessary to undertake to restructure them over a certain period of time and to re-inhabit them. It is not a suitable solution for everyone, but it is an idea to consider for those who want to move to a mountain or seaside village and own a property. If, on the other hand, you want to take advantage of this project for a future investment, you could consider the possibility of transforming the house into an accommodation facility, such as a bed & breakfast.
Step 2. Always with 1 euro it is also possible to try another investment, namely the S.r.l
to 1 euro, or simplified limited liability company. It is only necessary to remember that they are intended for entrepreneurs under the age of 35 and that the share capital must be between 1 and 9999 euros. Keep in mind that you will then have to face other costs to start the business, but in any case you will have a considerable saving on the deeds of incorporation. Alternatively, you can consider two even cheaper options, namely opening a VAT number in your name or a partnership. Obviously it is a solution recommended only to those who already have a business plan, a winning idea and infrastructure.
Step 3. Are houses and limited liability companies out of your league?
You can try to download the free Gimme5 application, available for iOS, Android and Windows Phone. It will allow you to save, but also to invest in mutual funds, and the repayment of the capital costs only one euro. You will be able to choose the investment according to your objectives in terms of risk or return. In fact, you can set your profile to be cautious, dynamic or aggressive. Compared to other investment ideas, it is undoubtedly an economic solution, within everyone's reach. There is no restriction on the duration, sum and frequency of payments.
Step 4. An investment does not necessarily have to be monetary or involve the purchase of real estate
To invest creatively it is possible to consider the world of collecting, but it requires patience (sometimes you have to wait months or even years) and a connoisseur's flair. For example, you could buy a recently issued stamp at a low cost and try to resell it to philately lovers when it has gained more value. You can apply this idea to many areas of collecting: works of art (although they may involve a higher investment), comics (the first issue or special editions are particularly valuable), dolls, magazines, books and so on. In some sectors you have to wait several years before you can resell, but in others you can try it a few months after the purchase by adjusting the price, so you will recover the cost of the product and generate a profit.
Advice
- At the beginning of your experience as an investor it is wise to ask for professional help. Look for an experienced financial advisor or ask a friend or acquaintance with such experience. Don't make the mistake of being too proud to admit that your knowledge isn't complete at the moment. There are many people willing to share their skills with you to avoid making you make mistakes dictated by inexperience.
- Especially in the first phase of your business as an investor, do not be tempted by high-risk investments just to be able to make a profit quickly; you could lose all your money even by making a single mistake.
- Always keep track of your investments to be able to pay taxes on any earnings and to check that they are in line with your economic plan. Starting with a clear and easily searchable outline will make things a lot easier in the future.
Warnings
- Be prepared to have to wait some time before you can have an economic return on your investments. When investing small amounts of money with very low risk, you need to be patient before making your first gains.
- Remember that any type of investment, even the safest, poses a risk. So don't invest more money than you are willing to lose.
