It is never too early to start investing. Investing is the smartest way to secure a financial future and to make your capital produce more money for you. Contrary to what one might think, investing is not only for those who have large amounts of money; you can start investing even with small amounts and the right amount of knowledge. By defining a schedule and familiarizing yourself with the tools available, you can quickly learn how to do it.
Steps
Part 1 of 4: Familiarize yourself with Different Investment Tools
Step 1. Learn the basics of actions
In fact, it is precisely the financial stocks that most people think of when they imagine they are "investing". Put simply, a share is the sharing of ownership of a publicly traded company. The stock itself reflects the value of the company, including its assets and earnings. When you buy stock in a company, you are becoming a full-fledged co-owner. The value of the shares of a solid and established company will most likely tend to rise over time, guaranteeing you a "dividend", which is an economic reward for your investment. Conversely, the shares of a company in dire straits will tend to lose value.
- The price of a share derives from the public perception of its value. This means that the cost of an action is dictated by what people believe to be its value and not its real value. The real price of a share will therefore reflect whatever value is attributed to it by the public.
- The share price rises when the number of related buyers exceeds that of sellers. Conversely, the cost of shares falls if the number of related sellers is greater than that of buyers. In order to sell a stock, you will always need to find a buyer who intends to buy it at the market price. Similarly, to be able to buy a stock you will always have to resort to a seller who intends to sell it.
- The term "share" can include multiple financial instruments. For example, a "penny stock" is a stock that is traded at a relatively low price, sometimes just a few cents (hence the name, "penny" actually means penny). Different stocks can also be grouped within an index, for example the Dow Jones Industrials, which is made up of the 30 most valuable stocks on the US market. Indices can be a useful indicator of the performance of the entire stock market.
Step 2. Learn about bonds
Bonds are a debt issue very similar to a bill of exchange. When you buy a bond, you basically lend someone money. The borrower ("issuer") agrees to repay it (the "principal") at the end ("maturity") of the loan term. The issuer also agrees to pay a fixed interest on the lent capital. Interest ("coupon") represents the return on investment in bonds. The maturity of a bond can be on a monthly or annual basis and upon maturity the issuer pays the entire principal borrowed.
- Here's an example: You buy a government bond worth € 10,000 at an interest rate of 2.35%. So you borrow your hard earned money (€ 10,000) to the state. Each year the State pays you interest on the bond issued, equal to 2.55% of € 10,000 equivalent to € 235. After 5 years, the state will give you back the entire loaned capital (€ 10,000). On balance, you got your capital back as well as a total profit of € 1,175 in interest (5 x € 235).
- In general, the longer the term of the bond, the higher the interest rate. Buying a bond with an annual maturity will most likely not guarantee you a high interest rate as one year is a relatively low risk period of time. By investing in bonds with a longer timeframe, for example ten years, you will instead be rewarded with a higher interest rate derived from a higher risk. This illustrates an axiom of the investment world: the greater the risk, the greater the return.
Step 3. Learn about the commodities market
When you invest in a financial instrument such as stocks or bonds, you are investing in what it really represents; the document certifying your investment is a mere sheet of paper with no value, but it is what promises to be valuable. A commodity, on the other hand, is an asset that has an intrinsic value, something capable of satisfying a need or a desire. Commodities include pork belly, coffee beans and electricity. These are goods with their own real value, used by people to satisfy their needs.
- People often trade commodities by buying and selling "futures". The term appears complex, but the meaning is not so complex. A future is simply a forward contract, to sell or buy on an expiration date, of a certain commodity at a predetermined price.
- Futures were originally used as insurance by farmers (a financial strategy called hedging). Here's how it works: Farmer G grows avocados, a commodity whose price is very volatile, meaning it fluctuates widely over a short period of time. At the beginning of the season, the market price of avocados is 4 € per bushel (unit of measure of capacity for dry and liquid, used in Anglo-Saxon countries and also adopted by the commodities market). If our G gets a bumper annual harvest, but the price of avocados plummets to $ 2 per bushel, the farmer will likely lose a great deal of money.
- Here's what G can do, before harvest, to protect himself from possible loss. He can sell a future to someone. This future stipulates that the buyer agrees to purchase all of G's avocados at the current price of € 4 per bushel.
- In this way G is insured. If the price of avocados goes up, he will be able to sell his crop at the normal market price. If, on the other hand, it drops to € 2, you can still sell it for € 4, making use of the contract stipulated through the future and obtaining an advantage over the competition.
- The buyer of a future always hopes that the cost of the commodity will rise above the price paid. This way you can take advantage of a lower purchase price. Instead, the seller hopes that the cost of the commodity will drop in order to be able to buy it at a lower market price and resell it at the higher price stipulated by the future.
Step 4. Learn to invest in real estate
Investing in real estate can be a risky but very profitable business. To this end, there are many different types of investments. You can buy a house and become the lessor of it. Your income will be represented by the difference between the mortgage payment and the rent received. Alternatively, you can decide to buy a house that needs a restoration, renovate it and resell it as quickly as possible. Last but not least, you can invest in mortgage derivative financial instruments such as CMOs or CDOs. Investing in real estate can be very profitable, but not without risks due to property maintenance and fluctuating market prices.
Some people are convinced that the value of homes inevitably tends to rise, but recent history has shown the opposite. As with many other investments, it is patience that ensures regular growth in property value over time. If your investment time horizon is short-term, then probably being the owner of a property is not able to guarantee you a certain profit
Part 2 of 4: Mastering the Basic Investment Techniques
Step 1. Buy understated goods (buy low, sell high)
Speaking of stocks and other assets, your goal is to buy at a low price and then resell at a high price. If you buy 100 shares on January 1st at a price of € 5 each and resell them on December 31st at a value of € 7.25, your profit will be € 225. It may seem like a negligible result, but if you talk about buying and selling hundreds or thousands of shares, your profit can grow enormously.
- How to tell if a stock is underestimated? Instead of relying on a single aspect of the market and deciding based on a single indicator or a momentary decline in the share price, you will need to take a closer look at some of the listed company's values: expected turnover, price / earnings ratio, and dividend-price ratio.. Use your critical thinking skills and common sense to understand if an action is really underreported.
- Ask yourself some fundamental questions: What will the future market trend be for these stocks? Will it be bleak or radiant? Who are the main competitors of the company in question and what are their prospects? How will the company be able to increase its turnover in the future? The answers may help you understand whether the stock of the analyzed company is undervalued or overestimated.
Step 2. Invest in companies you know
Maybe you have some basic knowledge about certain market sectors or certain companies. Why not put it to good use? Invest in companies you know as it will be much easier to understand their business model and predict future successes. Obviously not investing everything you own in one company, it would be a senseless and risky choice. Trying to make money from a company you know will increase your chances of success.
Step 3. Don't base your purchases on hope and your sales on fear
When it comes to investing, following the crowd is simple and tempting. We often get involved in the choices of others, assuming that they are based on real knowledge. So we buy when others buy and then sell when others sell. This is a simple scheme. Unfortunately, this is probably the quickest way to lose money. Investing in companies you know and believe in, while reducing expectations, is the best formula.
- When you decide to buy a stock to match the majority's choice, you are most likely buying something at a price that exceeds its real value. However, the market will tend to correct this change, and may force you to sell low after buying high, which is the exact opposite of your intent. Hoping that the price of a stock goes up just because everyone wants it is just madness.
- When you sell a stock in conjunction with the majority, you are selling an asset whose price is likely to be less than its true value. When the market makes the natural corrections, again, you will have bought high and sold low. The fear of suffering losses can therefore prove to be the wrong reason to get rid of the stocks in your investment portfolio.
Step 4. Understand the effects of the interest rate on bonds
Bond prices and interest rates are inversely related. When a bond's interest rate goes up, its price goes down. Conversely, when the interest rate goes down, the price goes up. Therefore:
Bond interest rates typically reflect the mid-market interest rate. Let's say you want to buy a bond with an interest rate of 3%. If the interest rate of other investments rises to 4%, and you own a bond that pays only 3%, not many will want to buy it, as they can buy others that guarantee an interest of 4%. For this reason, to be able to sell your bond, you will need to lower its price. The opposite situation applies when the bond's interest rate collapses
Step 5. Diversify
In order to reduce risk, diversifying your investment portfolio is one of the most important decisions you can make. Think about it: investing € 5 in 20 different companies, before you lose all your money it will be necessary for all companies to declare bankruptcy. Instead, investing € 100 in one company, it will be enough for this one company to declare bankruptcy for you to lose all your capital. Therefore diversifying your investments with a "hedging" strategy will prevent the possible loss of all your money due to the poor performance of a single company.
Invest in multiple different financial instruments to diversify your portfolio. Ideally your investments should include an effective combination of stocks, bonds, commodities and other instruments. Often when a category of financial products achieves poor returns, or even a loss, a different type of investment guarantees a high performance. It is very rare for all existing financial products to show a negative trend at the same time
Step 6. Invest for the long term
For your long-term investments, choose solid products, accompanied by substantial historical data. Firm and established companies (the task of identifying them effectively) will be able to withstand the ups and downs of the markets over time. Ultimately, investing for the long term will allow you to make the biggest gains compared to adopting a day-trading strategy, which involves buying and selling shares dozens, if not hundreds, of times a day. Therefore:
- Brokerage commissions add up. Every time you sell or buy shares, your broker, known as a broker, charges a commission for the execution of your order (they will have to look for a buyer or seller willing to fulfill your request). The accumulation of brokerage fees reduces your profits and increases your losses. Be far-sighted.
- Predicting large gains and losses is virtually impossible. In those days when the stock market makes a large upward move, substantial gains can be made. However, knowing in advance when such events will occur is almost infeasible. If you keep your money invested you can automatically benefit from these sudden market rises. By continuing to divest your money, however, albeit temporarily, you will be forced to accurately predict price increases. This is not an impossible thing, but the chances of success are comparable to those of winning the lottery.
- The stock market, on average, tends to rise. From 1900 to 2000, the average annual growth was 10.4%. This is a very significant performance, provided you adopt a long-term investment strategy and let the related compound interest yield. Here are some more statistics: investing € 1,000 in 1900 would have guaranteed you a net gain of € 19.8 million in 2000. An investment with a profit of 15% per annum takes only 30 years to transform € 15,000 into 1 million. Set your investment strategies for the long term, not the short. If you are frightened by the market downturns you may encounter over time, get a graph of the historical trend of the stock market over the years and hang it in a prominent place. You can watch it to regain confidence in those moments when the market will make temporary and inevitable downward corrections.
Step 7. Learn how to short sell
Rather than assuming that the price will certainly continue to rise, in technical jargon, "going short" means taking a bearish position, ie assuming that the price tends to fall. When you sell a stock (or a bond or currency) short, you become the owner of a sum of money, as if you had bought it. Your job is to wait for the share price to drop. In that case, you will have to, in technical jargon, "hedge", that is, buy back the shares sold at the current (lower) price. The difference between the sell and buy price will generate your profit.
Selling short can be very dangerous because it is not easy to predict a fall or rise in a price. If you decide to use this tool for speculative purposes be prepared to lose a large amount of money. Often the prices of the shares go up, and in that case you will have to buy them back at a price higher than the selling price to cover yourself. However, using this tool as a form of hedging to stop losses temporarily can prove to be an excellent insurance policy
Part 3 of 4: Getting started
Step 1. Early in your career, choose to invest in an Individual Retirement Account (IRA) now
If you have an income and are of age, and you still don't have one, set up a personal supplementary pension fund as soon as possible. Decide which annual amount to reserve for your individual retirement account, your money will be invested and will begin to increase. Also inform yourself about the current taxation relating to these instruments. If you're starting out and want to set aside some retirement savings, this investment is one of the best available.
- Investing in an individual retirement account as early as possible is crucial. The earlier you start investing, the more time your capital will have to grow. Simply investing € 20,000 at the age of 30, and then stop feeding your account, once you reach the age of 72 you will have accumulated € 1,280,000 (assuming a realistic annual return, supported by historical data, of 10%). This is a purely illustrative example. Don't stop feeding your account at 30, keep investing part of your income every year. At the right time, you can enjoy a reassuring retirement.
- How is it possible for an individual retirement account to grow in this way? Thanks to compound interest. The money you earn from the interest and dividends of your investment will be "reinvested" into your account. This means ever greater interest and dividends, in a continuous cycle. In practice, the money earned from the interests of your investment generates more income. Your individual retirement account balance will double approximately every seven years, again assuming an average annuity of 10% per annum.
Step 2. Invest in a corporate pension fund
Like an individual retirement account, a corporate retirement fund is an investment tool that allows you to set aside money for your future retirement. Unlike an individual retirement account, however, sometimes your company will contribute part of your retirement fund by paying an amount equal to a percentage of your salary. In practice, if you decide to pay € 300 monthly into your fund, your company will do the same. This contributory system is the closest to a form of "free money". Take advantage of it!
Step 3. Consider investing primarily in stocks, but also in bonds to diversify your portfolio
From 1925 to 2000, the return on stocks exceeded that of bonds in every analyzable quarter century. This means that if you are looking for a reliable investment, it is advisable to invest primarily in stocks. It will still be useful to add bonds to your portfolio to diversify risk. For a more prudent investment, as we age, it will become more and more appropriate to buy bonds rather than stocks. Read the previous passage about diversification again.
Step 4. Start investing some money in a mutual fund
These are funds made up of securities purchased by investors who have shared their finances. An index fund is a mutual fund that invests in a specific list of companies in a particular sector of the economy. Mutual funds reduce risk by investing in a number of different companies. Investing in companies that form stock indices such as the Dow Jones Industrials or the S & P500 may not be your worst choice.
- Mutual funds come in different shapes and sizes. They are managed by experienced professionals who base their investment choices on careful and accurate analysis. They can be equity oriented, bond oriented, or both. They can be managed aggressively, buying and selling stocks frequently, or conservatively (as is the case with index funds).
- Mutual funds have costs. Buying or selling these funds may incur additional fees, which you will be charged at the time of ordering. There is also the expense management ratio (MER), calculated as a percentage of the fund's total assets. Some funds charge a lower commission rate on long-term investments. As a rule, the MER is around 1% of the invested amount. In addition, distribution or other fees may apply depending on the fund management company.
Step 5. Take out insurance
Having a financial parachute is a good idea for two main reasons. First of all, should you lose all of your invested capital, you still have liquidity to rely on. Second, it will allow you to be a bolder investor knowing that you are not putting your entire capital at risk.
- Create an emergency fund. It will have to contain a sufficient amount of money to guarantee your current lifestyle for a period of six to eight months, useful in case you lose your job or face an emergency.
- Take out all necessary insurance. Include car insurance, home insurance, and life insurance. You may never need them, but if you need to, you will be happy to have signed them up.
Part 4 of 4: Making the Most of Your Capital
Step 1. Consider consulting a financial advisor
In many cases you will be required to create an investment portfolio with a minimum capital, for example € 20,000. Therefore, it may not be easy to find an advisor willing to manage your investments having little money available. If so, turn to an advisory service suitable for small investors.
How can a financial advisor help you? This is a professional figure whose job is to make you earn money safely by guiding you in your decisions. A financial advisor bases his skills on extensive money management experience. More importantly, his earnings are strictly dependent on yours: the more money you earn under his leadership, the higher his income will be
Step 2. Contact a broker
A broker is a person or company that makes investments for you. Relying on a broker is much easier than trying to invest independently. The services offered by brokers are numerous and diverse. Many online brokers guarantee serious support and low fixed commissions. Some companies complement their brokerage services with financial advice and complete management of the client's portfolio. Brokers usually require a minimum deposit to open an account, so make sure you have the necessary funds to get started.
Step 3. Get out of the herd
As mentioned above, the tendency to conform to the majority supports the idea that since there are many doing something, it is right that you do too. However, many successful investors behave in an unconventional way, making gestures that, when executed, others consider to be meaningless.
- Probably there are many who have considered the gesture of John Paulson insane, who in 2007 opened bearish (short) positions on sub-prime mortgages, betting in fact on the failure of the American real estate sector. At the height of the housing bubble, people kept thinking that prices would go up and that mortgage-related financial stocks on real estate properties would continue to generate "easy" money. As prices plummeted, Paulson made a profit of $ 3.7 billion in the year 2007 alone.
- Invest intelligently without being influenced by the fears of others. In 2008, at the height of the US housing crisis, the stock market lost thousands of points in just a few months. A smart investor would have bought stocks at that time in history, then resell them and make big gains on the next price rebound.
Step 4. Learn about the forces at play
Which institutional investors have opened a bearish position thinking your portfolio's share price is about to fall? Which mutual fund manager owns the same shares as you and what is their performance? In the financial world, being an independent investor is certainly advantageous, but it is still good to know the other figures involved and their respective roles.
Step 5. Constantly review your investment goals and strategies
Your life as well as market conditions are constantly changing, so your strategies must be as well. Don't let a stock or bond bind you to the point of losing sight of its value. While money and prestige can be important, never neglect what really matters in life: family, friends, health and happiness.
