How to Start Investing Safely?

Learning the fundamentals of investing in stocks is the most effective way to begin making money and achieving your financial goals.

I have seen people jump into investing without having the basics down and the consequences can be devastating. Imagine having the savings you have worked so hard disappear. That is why I want to share how to get started and be successful.

The Philosophy of Investing

Before putting a single dollar to the market, let’s understand the principles of the stock market. The key is to buy stocks in companies that are thriving and holding on to the stocks for the long-term. These are strong companies with great leadership and competitive advantages. They don’t even have to be checked upon all the time because they are reliable. The secret ingredient in the recipe for successful investing is patience. We have to be willing to hold on while our money grows.

Truth is, this way of approaching investing is more effective than any others out there. Many people believe that the main ingredient is day trading. Those with this belief think that this day-trading method is going to rapidly make them wealthy by frequently buying and selling at small profits will eventually add up. Unfortunately, this is not the case. The sobering truth is that these investors generally lose money. In fact, less than 1% actually wind up making money on a consistent basis.

Why is this the case?

Well, first of all, buying and selling comes with costs. Fees, taxes and commissions all take a chunk of our profits.

Also, very short-term investing could be compared to walking into a casino and gambling away our money. In the short-term, the fluctuation of share prices is random and unpredictable. Plus, just like in a casino, it is difficult to stay emotionally detached. Getting caught up in emotions can cloud our rational mind and create a doorway for costly mistakes.

When we are frequently trading, we lose sight of the relationship between a company and its stock. When we invest for the long-term, the stock prices tend to move in the same direction of the company. So, if the company is doing well, we can be relatively confident that the stock will too.

Seeking out companies that will successfully lead us towards meeting our financial objectives in the long-run is worth it.

Choosing Stocks

There are some choices when it comes to picking stocks. One way to go about it, the simplest way, is to purchase an exchange-traded fund. These types of funds own all of the stocks in a particular index such as the S&P 500 or Dow Jones.

The other method is to purchase individual stocks. While this does carry more risk than the first option, it also opens up more opportunities for reward. So, choosing a good stock could make us rich over time, but, on the other hand, it could also cost us our whole investment. When choosing this method, it is essential that we maintain a diversified portfolio with a variety of stocks so that should an unanticipated scenario arise, not all of our stocks will be in jeopardy.

There are a number of strategies we can employ when choosing individual stocks. We may focus on dividend-paying stocks in order to give ourselves some security. Dividend-paying stocks, coupled with a steady income, can meet our need for cash or it can be used to purchase additional shares. We can also become value investors. This means investing in stocks that are underappreciated and whose prices are lesser than the actual inherent value of the company. One of the most famous of them is, Warren Buffett and it would be an understatement to say that this provided him with some very high returns over time.

If we opt for investing in higher-risk business’, there is a higher possibility that the rewards will be bigger too (if we find the right company). On the other hand, by investing in a smaller business, we can find things out about that company while it is still young and that may help us to gain higher returns than an established company. This is because once a business has been around for a while, more and more investors will discover it.  Generally, stocks that have the most potential for growth don’t fall into one particular category. So, even if other investors start to become aware of the smaller company we decided to invest in and that brings the share-price up significantly, it could create future opportunities for even higher returns.

Our willingness to tolerate risk and our personal preferences will influence how each of us decide to employ these methods. Some of us may decide to go with one method and invest in a group of diverse stocks within a specific category, while others may choose to use more than one method to create a diverse portfolio made up by multiple, but different types of stocks.  There is no right or wrong way to approach it in this case. We just have to feel at ease with the plan we choose and be able to stay with it for the long-term.

Many of us shy away from investing because we just don’t have the knowledge we need to get started. I can assure you that nobody will make money from the market without investing. Learning the basics of investing and then doing it will create many opportunities to reach our financial goals.

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