My greatest fear as a beginner investor was the fear of losing money. I did not have more than a few dollars, which I earned by doing homework for other students at my school. I knew that my money was laying around under the idol of Krishna for safekeeping and that it wasn’t going to multiply by itself. After conversing with lead strategist Mr. Jeff Courtney and Mr. Tom Muir during one of our morning sessions, I came to the conclusion that my fear of losing money was actually a good thing. It showed that I cared about my well-earned money and that I would take the valuable step of minimizing my risks. When I invest in my first few stocks, I would like to diversify my equity into different, unrelated industries. This is even easier to do if you are willing to invest in mutual funds and index funds.
When I first considered investing, I wasn’t sure where I wanted to put my money. I needed to decide on a strategy respective to my budget. There are several fundamental strategies used by investors and some of the most common ones are the following: long-term, short-term, mutual funds/index funds, dividends.
The long-term investment strategy could be used if you have a few hundred dollars to invest. When choosing a public corporation to invest into, it is important to analyze the company’s industry and its growth over the years. Long-term investments are made periodically and are held over several years. You should only invest in a company with this strategy in mind if you think the company will do exceptionally well over a time-frame of 5 years or more. Additionally, returns from a long-term investment are taxed at rates below the income tax bracket.
The short-term investment strategy requires the investor’s full attention at all times. In most cases, you will be buying and selling stocks over the duration of a months to as little as a few hours for quick gains. When using this strategy, it is very important to keep a close eye on the companies you are investing into as to take full advantage of the short term swings in stock price. Since this strategy requires a massive pool of money to be effective ($25000 to be considered a daytrader), sums can easily be lost and the risk level can be very high for a short-term investor, proportional to the reward level.
Mutual funds allow you to pool your money with other investors to invest in stocks, bonds, and other securities. You can choose from thousands of mutual funds of which some are focused on specific industries and others diversify the capital into the whole market. I believe that is an especially great strategy for beginner investors with a small pool of money who want to own a piece of high priced stocks that they would ordinarily not be able to afford. In my opinion, Mutual funds are most effective for beginner investors with a small disposable capital.
Collecting dividends goes hand in hand with the long-term strategy. You can choose to invest in companies that do not pay dividends but reinvest their earnings into the development of the company or into companies that regularly pay a dividend as earnings. When choosing a stock to earn dividends on, you should make sure that the stock prices do not fluctuate too often.
Personally, I used a hybrid of two strategies from above when making my first investment. I chose this to reduce my risks and put half of my money into mutual funds and the rest into a long term stock. Investing into mutual funds is great if you want to preserve capital through diversification, while adding gradual growth to your account.
To get your biggest return, you will probably have to take higher risks and therefore, invest in individual stocks. A great way to decide on what company you want to choose is to research a company that interests you or a company that you feel connected with in some way. For example, I use and feel comfortable with Facebook(FB) as my long term stock pick so half of my initial investment went into shares of that stock.
There is no minimum amount to invest in many online brokerage houses nowadays. However, if you are starting with a smaller amount, you are going to want to invest more money regularly to build your portfolio to a higher value. As blogger/Personal Finance instructor Mr. Tom Muir says, “It’s time in the market, not timing the market.” If you are in the market over the long hold, you will probably meet more lows and highs and in turn, make more money. Failure to guess the right timing can lead to extreme losses.