Generally speaking, investing is the art of placing money at a moderate risk in exchange for a reasonable reward. You can invest in stocks, bonds or real estate. The end goal is to either earn income or achieve appreciation on the asset while you learn stock market investing basics.
The income earned after the asset has appreciated is usually referred to as capital gains. An investment is therefore the asset that you own, which you keep or sell to other individuals.
Here is a journey into how you can learn stock market investing. An overview of investments in the financial asset class which comprises of stocks, mutual funds, index funds, money market instruments, and a few more.
The Value of Money and Investing
Money is a medium of exchange used in buying the stuff we want and need. We buy in proportion to how much we have in our wallets. Sometimes buying on credit based on our ability (and often our hope) to cover the debt with our next paycheck. This reads like a tutorial for five year olds? But few people understand these basics.
We earn wages and salaries because we give to our employers the same value of labor in exchange for its financial equivalent. But be advised, nobody puts money to work just so that they can break even. Your employer has to gain a far higher return or value in proportion to what he or she pays you. And this is where investing comes in.
Investing gives a person, a company, or country, an opportunity to use money to make more money. The new money that your current money makes may be classified as interests, dividends, capital gains – depending on what manner of industry or asset class it is invested in.
Always have some savings put aside each month by budgeting. Use the 50-30-20 Budget Rule for example to gather a minimum of 20% of your after tax dollars as your investment capital. Your investments will begin to yield interests and/or dividends (depending on the asset class), it is combined with the existing principal. This idea is called compounding. It assures the investor a rapid way of accumulating wealth over time.
Buy Financial Assets
Financial assets available today include: Cash, Stocks, Bonds, Treasury Notes, Fixed Deposits, Mutual Funds, etc. A financial asset does not necessarily have inherent physical worth or even a physical form. It is however, an economic instrument that may derive its value from an existing physical or hard asset. Such as gold, coffee, cotton, rented apartments, etc. Or it could also derive its value and attributes from another existing financial asset. Such as a derivatives like Stock Options.
Financial Cushion
We all need to own financial instruments. It’s the best way to make money while one sleeps. Compounding as mentioned before, works for you day and night. It grows and grows and fills the individual with much confidence to face the years ahead. You are secured in the event of disability or unemployment. It helps when you can no longer work or earn a regular income from an employer.
Dive into the Basics
The easiest of these is the money market instruments, which may be sponsored and/or sold by banks and financial institutions. The investor usually gets a safe place to employ his wealth, but with limited profit potential for his money. Money Market investments such as CDs etc are for short term holding periods of up to one year or so.
The other way to test the waters is to invest using a stock simulator. This will shield you from the risk of loss of your money in the event of mistakes made.
Upgrade to Stocks
On the other hand, a riskier but highly recommended avenue is investing in stocks traded on the stock market. With due diligence and a good understanding of financial instruments, the investor sets himself to earn a lifetime of dividends and capital gains. Capital gains are the profits that one earns after selling an asset such as a stock or real estate after it has increased in value over the holding period. The investor also has the option of keeping the price appreciation in the asset or investment without selling.
Don’t get Emotional
The main downside of investing could be the emotional aspect. If one is emotional about one’s investment activities, he or she ends up buying an asset at the wrong time or wrong price, and then sells it at a loss. If your stock investment loses value through volatility, it is just a paper loss. Until you exit that position it is not a real loss. There’s always a good change of it bouncing back.
Discover the step by step process of how a beginner can start investing in stocks to gain a more in-dept knowledge and hands-on approach.
Aspire to Have Multiple Steams of Income
The Multiple Streams of Income book written by Robert G. Allen in 2005 has great information. On the subject matter, Allen states that people are far from financial freedom if all they have is a single stream of income. It is risky to have money coming from only one source. He further states that for a person to be rich, they must first attain a level of money mastery before moving on to increase wealth with that money skill.
Building wealth requires the ability to live within one’s means. Start saving from the top. Each income stream generated throughout the life of the saver builds capital. The capital is then employed to generate cash flow. Discover the basics of saving money to build your nest egg, a more in-dept saving process is explained.
The top categories of income streams come from the under listed asset classes:
- Businesses: Income made from marketing a product or service to customers.
- Investments: Stocks, Bonds, Money Market instruments and all paper assets.
- Real Estate: Income from rent, leases, or outright sale of the property.
- Internet: Websites or Apps that make money from selling products, services, ads, subscriptions, affiliate referrals, etc.
Join or Form an Investment Club
An investment club is simply a collective investment scheme of like-minded members who aim to conduct investments in a particular asset class or more. An example is a bunch of friends who pool together their savings to buy shares on the stock market. The need for starting or joining an investment club varies from person to person. But its underlying benefits are listed as follows:
- To have a multitude of decision makers and reap the benefits of joint efforts.
- Pool of contributions used to buy assets or stocks that may be out of reach of members acting alone.
- Investments may carry a certain amount of risk, and therefore the uncertainty is spread and cushioned among many.
Discover what the benefits of an Investment Club is and how you can find one. Find a great way of making money, sharing ideas, and learning from others.
Never Lose Money
As the old adage says, ‘Never Lose Money’. There are two rules of investing. Rule one, never lose money. The second rule is, don’t forget rule number one. These ancient words of wisdom have been by some of the most successful investors in the world such as Warren Buffett. (Buffett is still the Chairman of his investment holding company Berkshire Hathaway in Omaha, Nebraska at his ripe old age.)
A word about risk
If you want to play a risky hand with your hard earned cash, the surest path would be the use of leverage. Leverage means borrowing to increase the purchasing power of your current investment capital. So that a smaller amount of money could control a larger volume of assets. its helpful if you know exactly what you are doing. Risk is a definitely a barrier to investing in stocks for the risk averse. But arming yourself with financial literacy cushions the operation.
Watch your borrowing
Borrowed money always costs the borrower. The cost of borrowing is known as interest. well, the lender would expect their money back with an interest payment that compensates them for the risk of losing their money – in case the borrower defaults. Be advised that things go wrong all the time. Even the most knowledgeable and experienced investor stands the chance of falling under a mountain of debt if he fails in his investment operations.
So therefore, be aware of the risks associated with your investment undertakings. The poor house or jail awaits all whose over confidence in leverage have resulted in their downfall. These rules below are known to cushion most prudent investors from falling prey to investment failure. They are as follows:
- Never borrow money.
- Always have a thorough understanding of your assets and investments before diving in.
- Diversify your investments to remove the possibility of total loss of your portfolio. However, beware not to overdo it to diminish any great upward appreciation. Higher investment appreciation exit for investors with smaller holdings.
- Don’t act or base your actions on emotions. Emotions once misplaced, cause irrational behavior and lead to many mistakes and misjudgments.
- Use an Emergency Fund to accumulate and hold cash for emergency purposes.
In Conclusion
The above contains a basic guide that will get you started if you want to learn stock market trading. Your investing journey is a series of steps. You will get attracted to a specific asset class or two. This should lead you into a mindset of focus.
Unlike other beginners who pride themselves on the variety of fields they know, without any special concentration or mastery of anything.
Share your views with us in the comments below. Are you gaining momentum from concentrating on an asset class such as stocks, or are you open to having a variety of mixed nuts in your investment basket.
In Summary:
- The value of money and investing
- Buy financial assets
- Aspire to have multiple streams of income
- Join or form an investment club
- Never lose money
Further Reading: Check out our book recommendations on this topic from our Resources Page.
Most Popular Posts:
- 12 Giant Steps Financial Freedom Seekers Take To Retire Early (Epic List !!!)
- Learn to Trade Stocks Step by Step for Beginners (A Comprehensive Guide)
- Top 10 Financial Freedom Courses (Mostly FREE)