September 2, 2010
Money Basics: How to Begin Investing
For some, investing may seem complicated and downright confusing. But, when it comes to building wealth, investing in stocks, bonds and other funds help you reach savings goals and ensure you have money for your retirement or for loved ones in case something happens to you.
John Gannon, senior vice president of The Financial Industry Regulatory Authority(FINRA)‘s Office of Education, offers these steps to begin your journey in investing:
Determine your goals for investing. Why are you investing? Do you want to save for retirement or to pay for college education for your kids? That’s very important to know because that will determine what investments will fit your time objectives. The longer time you have, the more options are open to you.
Understand your risk tolerance. How comfortable are you with the potential of losing money in the stock market? Some people can be comfortable with this while others would be very uncomfortable.
If you have a high risk tolerance, and you’re saving for retirement, for example, you might invest in riskier stocks such as growth stocks. If you’re close to age of retirement or saving for child’s college education, you might be more conservative with your investments.
Determine how much money you have to invest. Think about what your savings are, or the money you have left after all expenses are paid. (When you look at your savings, a certain amount should be set aside for emergencies.) Then, think about what other goals you have for those savings, such as retirement.
Determine what types of funds, or investments are best to meet your goals. Would it make more sense to invest directly in …
Stocks: Shares of the ownership of a company
Bonds: A debt security in which the authorized issuer owes the bond holders and principal is repaid at a later date
Other securities: These can vary from type to issuer.
Pooled investments handled by a professional funds manager: such as a mutual fund, or exchange traded fund (ETF), an investment fund traded on stock exchanges which holds assets such as stocks, commodities, or bonds, and track an index, such as the S&P 500 or MSCI EAFE. With these types of funds you get diversification across several different stocks immediately with a single purchase.
Do your research. Three important types of information to look for in a company before investing are earnings, revenue, and debt. This can be found in SEC filings, along with nonfinancial info such as what the company does, what plans the company has, and what risks the company faces such as lawsuits. These issues can be very important to assess overall risk of that investment.
If you’re working with a broker or adviser they often have terrific research tools which will allow you to compare different companies’ earnings, revenue, debt.
Also, look for news that may positively or negatively impact the company, such as regulatory changes or new government legislation.
It helps to invest in something you know. For example, if you’re a runner, you might have an interest in a sneaker company and compare competing companies.
You can check out financial Websites that track how a company’s stock is doing in the market (such as online brokerage sites, NASDAQ, S&P 500, and other financial news sites.)
Get professional assistance and be sure they are licensed. A financial or investment adviser can make recommendations to you on what types of investments to make to meet your goals. A broker can help you actually execute the trades as well, in some cases. FINRA offers a free online tool that allows you to research professional brokers and brokerage firms.
Going the DIY route? There are companies that allow you purchase stock directly from the company in the form of stock purchase plans, however, they do not make recommendations or give guidance as far as your investments.