According to Warren Buffett, investing is “the process of laying out money now to receive more money in the future”. The goal is not only to secure your savings from constant devaluation, but also grow them over time. The good thing about investing is that there are numerous types of investment vehicles and not all of them require huge sums of money to begin with.
Even with little money, you can maximize your returns by investing wisely. As opposed to consuming, investing creates a nest egg that secures your future by growing your savings in value over the years. While there are quite a few forms of investment and savings available – real estate, gold, prize bonds, savings accounts, etc. – stocks present an attractive option to start with, at a low cost.
But before you commit to investing in stocks, read these tips that will allow you to maximize profits on your investment while minimizing the risks.
Get investment education
It all starts with how familiar you are with the kind of investment you are about to make. And this is the purpose that this article (and others in our investment blog) aims to serve.
To hold individual stocks, you’ll need to learn all that you can about investing. Read books, watch videos, take a course or two at a brokerage firm, join investment forums, and start following and understanding the business news.
This education will help you to devise a custom investment strategy that works for you. Identify if you’re a risk-taker or a conservative risk-averse, whether you’re a long- or short-term investor. Surrounding yourself with investment experts is also a great way to become fluent in investments before you begin investing with real money.
Assess your finances
The first practical step towards investing is assessing your financial situation and seeing if it can accommodate a new activity. Your financial baggage includes everything from income to debt, to your household budget.
If you have a job or other source of income, make sure that it’s secure enough to allow you to try your hands at a new investment avenue. If there is a loan that you have to repay, the general advice is to clear it before you get into investing in stocks.
Also consider your household budget and family expenses. If you have that or are about to go to school or college, you’ll naturally prioritize their education over any investment. It goes without saying that it’s only after paying for your house rent, bills, food, and kids’ education that you’ll be able to invest any surplus money.
Put some money aside
Investing in stocks, like other forms of investment, is not risk-free. There are daily fluctuations in stock prices and something as insignificant as a bad rumor can bring the stock value down. While the stock market generally trades up, it’s advisable to not invest all the money and put some aside, just in case.
This amount will act as an emergency fund that will help you in the event of a temporary income disruption or other financial emergencies. Plus, the sum of money that you have put aside will help you avoid panic-driven decisions that prove to be wrong in the long-term.
To make wise investment decisions, you need the peace of mind that your secure savings will provide you with. No decision that’s prompted by your fear of getting behind in your monthly dues and expenses can be the right and wise one.
Begin with Mutual Funds
As a novice investor, you’ll be better off with investing in Mutual Funds. These are usually professionally managed, so remove the burden of stock selection from your plate.
All you need is open an account with one of the Mutual Fund houses available, determine how much money you want to put into a given fund or group of funds, and wait and watch.
One key advantage of investing in Mutual Funds is that you don’t have to worry about diversification as each fund already holds numerous stocks.
Gradually move to investing in individual stocks
So you have tried your hands at Mutual Funds and have acquired decent knowledge of the stocks. Now should be the time that you feel comfortable to gradually progress to investing in individual stocks.
You can begin investing in stocks – one at a time – as you work toward building a portfolio because you already have significant positions in mutual funds by now. The one most important thing to remember is to never overload in a single stock!
Begin with taking a minimal position in one stock – generally 100 shares – and then move to a different stock. It’s recommended that you repeat the process until you have several stock positions in your portfolio.
Remember to diversify!
When it comes to diversifying your investment portfolio, you’re already almost there as your money is invested in diverse investment channels. But now as you’ve moved to individual stocks, you also need to spread out your capital among various equity sectors.
Diversification can help you as an investor in managing risk and reducing the volatility of an asset’s price movements. The key is to find a happy medium between risk and return; this ensures you can achieve your financial goals while still getting a good night’s rest.
But remember, the risk can only be reduced, not completely eliminated regardless of how diversified your portfolio is. The general market risks affect nearly every stock and so it is also vital to diversify among different asset classes.