First things first, investing and trading are two different things although they both try to yield profit in the financial market. Investing is longterm and the goal is to build wealth by holding onto your investment instruments. Trading on the other hand is short term and involves more of buying these instruments at a lower price and selling them for a profit, the goal for traders is to beat the returns ‘buy and hold’ investors would have made. Traders seek to make more return than investors would in a year.
Steps to Investing:
Pay off all high interest debt: Specifically credit cards, ignore mortgages and student loans because they are typically not high interest. The reason you should pay off all high interest debt is because the interest charged on holding onto the debt is usually more than the returns you might make. In addition to that, if you are investing, you ideally shouldn’t have plans to access the returns made in time to pay off your debt.
Build your emergency fund: Super important because God forbid an emergency sprang up on you, you need to have readily available cash because your investments are more or less tied up for a while and cannot be treated as a part of your emergency fund. Your investments are a part of your net worth but not necessarily cash available to you.
Consider your financial situation: Have a 360 look at where you are and your current financial obligations .This shouldn’t deter you from not investing at the moment, it could help you in setting financial goals (e.g pay off all high interest debt so I can start investing in 2 months) as well as help you determine how much you would consider investing at the moment.
Think of your why: Why do you want to invest? For retirement, to go back to school, to buy a house, to build generational wealth?
Your ‘why’ will guide you.
Learn as much as you can about investing and do your research: The common terminologies, the different investment types and instruments and investment strategies. Research on stocks you are interested in and think have the potential to double in value. Research on the platforms you would like to use (robinhood, financial providers, wealthsimple, acorns), how safe they are, the fees they charge.
Determine your investment strategy and your level of risk: Are you trying to grow your portfolio or get passive income such as dividends from stocks you have invested in or do you want to make an impact in certain sectors (green, sustainable) or value. In addition to that, what is your level of risk. The more risky you are as an investor, the higher your returns will be but you will also lose more compared to a low risk investor.
Think of what investment instruments you are interested in and how you would like to go about it: Are you interested in investing in company stocks, or index funds, mutual funds, bonds or exchange traded funds? Do you have the time to research to make sure you are making the right decisions? Are you more comfortable with mutual funds through a financial provider or you would rather build your portfolio yourself or a mix? These are some things to think about before you start investing because this affects how you would go about about investing.
Build a watchlist of stocks or companies you are interested in.
Start: Preferably start small but the most important thing is starting.
Build a portfolio: Don’t put all your eggs in one basket!
My 2 cents: Personally, I would advice starting out with mutual funds or exchange traded funds because these usually are a pooled portfolio of company stocks, bonds and are already done for you. Try out auto pilot investing using platforms such as wealth simple. Ask questions too!
That’s it from me, please let me know if you have a questions, comments, thoughts or just say hello. If you found this helpful, please share.