How to Start Investing
- There are numerous pathways available for individuals looking to learn about investing or where to begin saving money. Here are some recommendations for initiating your investment journey:
Conduct thorough research. It is crucial for investors to comprehend the financial instruments they are investing in. Whether it involves purchasing shares of a reputable company or venturing into more speculative investments, individuals should conduct their own research rather than solely relying on potentially biased third-party advice.
Develop a personal budget. Prior to investing, individuals should evaluate their capacity to set aside funds. This includes ensuring that they have sufficient funds to cover monthly expenses and have established an emergency fund. Despite the allure of investing, individuals should prioritize meeting their daily financial obligations.
Understand liquidity constraints. Certain investments may have limited liquidity, making it challenging to sell them. Some investments may have lock-in periods during which they cannot be liquidated. While not always explicitly stated, it is essential to determine whether specific investments can be easily bought or sold.
Consider tax implications. In addition to liquidity, investors should be aware of the tax consequences associated with buying or selling investments. Given the unfavorable tax rates on short-term capital gains, investors should consider not only the investment product itself but also the tax implications of the investment vehicle.
Assess your risk tolerance. Investing inherently involves risk, which means there is a possibility of ending up with less money than initially invested. Investors who are uncomfortable with this risk can either limit their investment to an amount they are willing to lose or explore risk mitigation strategies.
Seek advice from a financial adviser. Many financial experts are available to offer guidance, share insights on market trends, and provide access to online investment platforms.
Different investments across various industries can be appropriately compared using the concept of ROI (Return on Investment). To illustrate this, let’s consider two investments: a $1,000 investment in stocks that has increased to $1,100 over the past year, and a $150,000 investment in real estate that is now valued at $160,000.
The ROI for the stock investment can be calculated as follows: ($1,100 – $1,000) / $1,000 = $100 / $1,000 = 10%.
Similarly, the ROI for the real estate investment can be calculated as: ($160,000 – $150,000) / $150,000 = $10,000 / $150,000 = 6.67%.
Although the real estate investment has gained $10,000 in value, many would argue that the stock investment has outperformed it. This is because for every dollar invested in stocks, it has generated more profit compared to every dollar invested in real estate.
However, it’s important to note that ROI is not the sole factor to consider when making investment decisions. For instance, let’s compare an investment that consistently earns a steady 10% ROI each year to another investment that has an equal chance of earning 25% or losing 25%. Some investors may prefer the stability of the first investment, even though it offers lower potential returns compared to the second investment.
In general, investment return and risk tend to have a positive correlation. Investments with higher risk often come with the potential for higher returns, while safer investments typically yield lower returns.
When making investment decisions, it is crucial for investors to assess their risk appetite. Each investor’s risk tolerance will vary, as some may be willing to take on higher risks in exchange for the possibility of greater profits. On the other hand, risk-averse investors may prefer safer investment options that provide consistent, albeit slower, growth.
