What is the First Step to Investing?

November 5, 2010 Investing/Trading, Stock Investing, Stock Market

Beginning investors will ask “what is the first step to investing?” They are typically looking for a stock tip or some piece of investment wisdom that will quickly and easily make them rich. The answer to the question, “what is the first step to investing” starts before that and may seem unassociated with investing, but it is definitely not. The point of investing is to make money and not lose it. The point of investing is to end up with a larger number on the bottom line than when you started. To accomplish this goal an investor needs to consider investment risk as well as reward. He needs to look at factors that put a drag on his earnings as well as investment opportunities. Besides asking how much money do I need to start investing the fledgling investor should look practically at what is the first step to investing, reducing high interest debt.

What is the first step to investing? It is to get rid of high interest debt, credit card debt. A realistic approach to investing is to make more per year than you would make after taxes from depositing money in a bank account and more than the rate of inflation. With the principle of compounding (exponential growth) an investor can gradually and profitably grow an investment over the years. What is silly is to be making a few percent more than a bank account pays but to be paying out 18% a year on credit card debt. Get rid of your credit card debt as a good first step to investing before worrying about how to start investing in the stock market.

But, what is the first step to investing if you have already paid off all credit cards? A next good place to look has to do with the drag on profit that taxes cause. An excellent means of investing without paying yearly taxes is with an IRA. If your employer matches IRA contributions you can immediately double your investment by putting money into this tax deferred vehicle. Also, aside from any employer contributions, money in an IRA will compound over the years without being taxed. You will typically take your money after retirement at which time your tax rate will be lower. What is the first step to investing? After paying off excessive high interest debt it is put money in tax deferred vehicles. But what should you invest in inside of an IRA. That is the next answer to what is the first step to investing and gets into the question of what is a good investment.

Actually, the better question may well be what is the best investment for my money? There are many, many investment vehicles. Starting with the basics is a good idea. Many investment advisors suggest starting a savings account and saving until it contains enough to cover six months of your expenses. The point of this is that you will not need to tap into a promising investment just before it hits pay dirt if you have some ready cash. Now that that all of these bases are covered what is the first step to investing? A good choice might be a common stock of a company that makes a product that you know. Look for stocks with low price to earnings ratios as they may be underpriced. Look for products that seem to be popular and look at the company’s balance sheet. Buy the stock and then continue to follow to make sure that the stock remains a good buy. What is the first step to investing? Start small and learn from both your mistakes as well as your successes.