How to Learn to Invest your Money

By Anne El Bey

According to “TheStreet,” when you learn to invest your money, it does not have to be difficult. There is no need to rush. Take your time and familiarize yourself with the financial terms and learn at your pace. Know who you are as a person. It will guide you in making the right decisions. Set attainable goals for yourself and get your financial house in order. 

Knowing your investment philosophy

As a beginner, when you learn to invest, you need to know what style suits you. Before getting into investment styles, knowing the person you are will decide how well you do according to Professor AswathDamodaran.

• Are you a patient person?

It takes patience to find the right investment that will work for you. If you like to rush things, you are better off finding something with short-term gains. It takes patience to learn to invest.

• Do you like to take risks?

If you like to gamble, you will pick aggressive stocks, bonds, or mutual funds, hoping to get a huge return.

• Are you more conservative?

If you worry about losing your money, you will make safer choices. However, the return on investment would be much smaller.

• Do you like to follow the crowd?

If you see someone doing well with his or her investment portfolio, copy his or her style of investing.

• Do you have spare time?

You will not make money overnight depending on your choices. Pace yourself when you do the research. For example, if you are looking to make money in the short-run, it will take time and effort to pick the right investment. 

• How old are you?

As you get up in age, you want to go out on a limb. Your retirement fund may not be as much as you want it to be. There is a possibility it might reduce in value. Based on your experience as an investor, you may take more risks to increase your bottom line.

What is your investment style?

Develop an investment style to help you find the right securities for your nest egg. Investopedia has grouped the styles in three categories.

1.    Active/Passive Management Style

If you have large sums of money, an active or passive management style would be the right choice for you. Hire a professional money manager. He or she will know what risks to take based on your tolerance. Money managers have full-time researchers on staff to do the legwork for them. Please note you will pay a much higher expense for such duties.

2.    Growth/Value Investment Style

When you invest in growth, you look for companies with a higher return on investments (ROI). They will also have a higher profit margin and a low dividend yield. You want to make lots of money, so this would be your best choice. The fund reinvests the earnings for continued growth in the long-term.

A value style of investing focuses on undervalued stocks. These shares trade far less than other stocks. Investors believe the market behaves irrationally based on accurate or inaccurate news. The market may react in opposition to a company’s long-term goal, which gives the investor an advantage to buying at a lower price. 

3.    Small Caps vs. Large Caps

Investing in small cap companies provides you with a higher rate of return. There is more growth potential because of the quick turnaround.  Getting such high returns come with its share of risks. Smaller firms have fewer resources with undiversified funds. Stock prices move up and down, resulting in huge gains or losses.

If you do not want to take risks, the large cap would be a better choice. Companies like these have been in business for a while and had a name for themselves. Examples of such enterprises are Microsoft, GE, and Exxon Mobil. Such large companies do not grow that fast, but there is less chance of them going out of business at the last minute. The returns and risks are much lower with large caps.  

Learn to invest and set a financial goal

When you learn to invest, you may know how much money you would like to have in the bank. According to Kiplinger, setting a financial goal will keep you focused on getting there. Set long-term and short-term goals based on what you would like to get out of your investment. For example, would you like to go on a dream vacation? Are you planning on purchasing your first home? Are you saving up for your retirement? Use those goals to help you save money at a reasonable pace.

Examples of short-term goals:

 

•         Buying a car

•          Pricey Appliance for your home

•          Repaving the driveway

•          Replacing the roof on your house

Examples of long-term goals:

 

•          Purchasing a house

•          Saving for retirement

•          College fund for your children

•          Buying a boat

Your financial goals have to be realistic. It should get you excited to help you reach your target. Is it something that will make you save right away? If the answer to the question is “Yes,” you are on the right path. You have dreamed of owning a home since you have been a child. Now you are working, you can say, “I would like to buy my first home when I am 35 years old.” That is an example of a realistic goal. You have been dreaming about it since you were a child.

 

Organize your finances  

When you learn how to invest your money, you will have to map out your finances. Prepare a chart of your living expenses. Start with gas money, bus or train fare, and your household expenses, which include utilities, mortgage or rent. Cover all expenses on the list even if they are small amounts.

Jot down your monthly income on a separate list. Start with your wages and add money from a spouse or money from elsewhere. Subtract all your expenses from your income. Use the rest to invest and spend.  You can learn how to invest with the extra money.

  

Learning basic terms

 

Learning how to invest requires knowing the basic terms:

•    Stocks

They are instruments giving you ownership in a corporation. You can make such claims on assets and earnings.

•  Bonds

Owning a bond is like holding debt. The investor lends money to whoever is investing, and the investor holds on to it for a period at a specified rate of interest.

• Mutual Funds

They are investments involving a group of funds from various sources, which includes stocks, bonds, and money market accounts.

• Certificate of Deposit (CDs)

          It is a savings account that has a fixed maturity date and a fixed 
          interest rate.

• Diversification

It is a way in which you mix up your investment with various funds to avoid losing most of your money. When you learn how to invest, you will choose funds with more diversification.

You can find other terms here listed in alphabetical order.

What are the costs associated with investing?

When you learn how to invest, you will find most of them come with hidden fees. Nothing is for free. You will pay for the service of getting a return on your investment. The hidden costs are:

•  Front-end loads

These are commissions brokers get for selling mutual funds. They are not good choices for investors. Front-end loads are up-front fees you have to pay out. It will take a chunk out of your portfolio--not what you want as a beginner. The situation gets worse if you have a bad investment. You will still have to pay the fee on top of the loss. 

• Back-end loads

It is a mutual fund with a sales charge you pay when you sell the fund. The fee calculation is a percentage of the value of the shares you are selling. When you buy mutual funds, you will notice the grouping of securities such as class A, B, or C.

The three types of shares have fees associated with them. You are better off not buying any of them. Class A shares have a front-end load. Class B and C shares have back-end loads. The fee is about one percent if you sell them within one year.

• 12b-1 fees

         These costs are unavoidable. They are marketing and distribution costs. 
         You will find them listed in the mutual fund’s prospectus. Fund managers 
         often pay brokers from the 12b-1 fees they have collected.

• Management Fees  

They are part of the fund’s total operating expense. The fees vary based on the security you have purchased. International equity funds have a higher cost associated with them, but bond funds carry a much lower price.

To find out the best investments for beginners, read it here.

Conclusion

When you learn to invest, you will need to figure out the person you are. See if a particular style suits you best. Set long-term and short-term financial goals to help you reach your target much faster. The goal has to be realistic enough to get you excited about investing. Organize your finances by adding up your expenses and subtracting them from your income. Use any leftover income to spend on your venture. Familiarize yourself with the basic terms to avoid confusion and find out how much it will cost to finance your investment.