Successful investing is not a matter of luck, tips or playing the market. Three basics of successful investing are sound fundamental analysis, appropriate risk management and patience in waiting for investment opportunities. Let us start with risk management first of all.
Risk Management in Your Life and Investments
Investing is part of life and not a separate entity. So, it is important to have your financial life in order before even starting to invest. Build a stable financial platform for your life first of all.
Pay off any credit card debts: It is difficult for a beginner to make 18% a year on investments but that is what you are probably paying on credit card interest.
Build a cash reserve: Put enough money in a bank account for six months of food, utilities and mortgage payments. Investments do not always do well so do not find yourself losing money on an investment that should have gone to buying food for your children.
Buy instead of renting: One of the best investment deals around is still the deduction of mortgage interest from your federal taxes.
Once you have done these things the next basics of successful investing are to decide why you are investing and to develop investment strategies to get what you want.
Decide How Much Money to Put at Risk
There are generally safe investments like many dividend stocks and there are growth stocks that may result in a hundred fold return on investment or may go bust. The basics of successful investing require that you diversify your investment portfolio to include safe albeit low paying investments and investments with the potential to let you retire early to a life of ease. The longer you have to invest before you want to use your money the more risk you can take. If you are simply investing for retirement you can pick a handful of higher risk stocks knowing that if you lose money on them you can make it back with the slow steady returns of you conservative investments. If you are investing to put your children through college you will have a shorter time frame.
Learn and Practice
While you are waiting to get enough money together to start buying stocks start reading about the stock market. Learn about the various market sectors. You can get a lot of quick information from sources like the Google or Yahoo Finance pages. And continue to read. There is always a lot of hype written about the markets and individual stocks. Read what the experts say and then wait to see what happens. For example, at the top of a market rally there tends to be a lot of enthusiasm that evaporates along with inflated prices as the market crashes. And, pick a couple of stocks that you like. You can simply note the price in a notebook and pretend that you bought it or you can buy one share of a stock like Apple for about $100. In either case you will learn how to pick stocks, follow them, read financial reports and when to sell before a correction.
Look for article II of basics of successful investing next week.