What you need to know to get started.
Getting started with investing can be a daunting task. But like riding a bicycle or just about any other endeavor, you simply need to start small and build up your skills and experience from there.
Some might just jump in without getting started—others need to have guidance every step of the way. Every beginner has different comfort levels, but there are a few key things you need to know before you start putting your money to work.
Item #1: Stocks are ownership claims on a business.
It can sound like a pretty silly point to make, but many investors and traders often get so hung up on various issues like interest rates or trade wars that they forget the overall fact that what they’re buying is part of a business. The fact that it’s a piece of paper (or, today, a digital claim) that can fluctuate in value often seems far removed from that fact.
But there’s a big mental different between buying just a piece of paper that may change in value (hopefully upwards!) and a piece of paper that represents part of a growing business. When you stay focused on the fact that an investment is an ownership stake, you take a different attitude towards making the right decisions that will grow your wealth over time, rather than look to flip a quick profit.
Item #2: It’s okay to have losses. In fact, expect them.
Most beginning investors are concerned with a loss. Here’s a fact: They’ll happen. Even great traders will lose half the time and still make money. That’s because they know that losses are inevitable, but they’ll have a policy for limiting their losses and letting their winners ride.
When you first start investing, losses are even more important. They’re a key learning experience, and until you’ve put actual money to work and lost it, you won’t really know how you’ll react to it. When you factor in the cost of learning about losses early in your investment career, you’ll be able to offset it with better investment decisions in the future. But everyone has them, and, just like in baseball, nobody bats 1.000.
Item #3: Don’t let analysis paralysis stop your investment plan.
Investing requires a few key decisions at the right time. And many a potential investor has sat down, done their homework, and made a commitment to buy something—only to let the opportunity pass. One of the biggest mistakes investors can make, and one that typically causes beginning investors to call it quits, is this analysis paralysis that prevents them from making a decision and acting on it.
If you’re following some basic investment rules like diversifying your portfolio, cutting your losses short and letting your winners ride, there should be no hesitation over any one trade, much less your entire portfolio. But the fact of the matter is, for many investors, making no decision is a problem—and one that’s worse than making a bad decision. A bad decision can be fixed, but making no decision remains a problem.
Item #4: Know the basics before getting started.
Some investors are so keen to get started that they just throw money into a great idea they heard about rather than do their research.
But there’s a lot to know. We’ve already covered that a stock is a form of equity, an ownership stake in a company.
Here are a few more key items to remember:
A bond is a loan you make to a company rather than taking an ownership stake. The bondholder doesn’t get more money if the shares go up, but they get a guaranteed return and they’re the first in line for company assets in the event of bankruptcy.
Options contracts don’t hold any ownership stake, but they can allow you to control 100 shares of a stock for far less than buying 100 shares outright. That makes it akin to a leasing agreement, and also acts as a form of leverage.
A Final Word
Starting investors typically either act too conservatively—sometimes even failing to pull the trigger and make an investment—or dive right in without reviewing the basics. The world of investing is infinitely complex and dynamic, with millions of changes every day. It’s okay to have some trepidation, but knowing the fundamentals and how to invest will help you get started and avoid the major mistakes that can derail a portfolio that’s just getting started.