How To Start Investing
There are many different avenues one can take when learning how to invest or where to start when putting money aside. Here are some tips for getting started in investing:
Do your research. A common phrase used in the investing industry, it is important for investors to understand the vehicles they are putting their money into. Whether it is a single share of a well established company or a risky alternative investment endeavour, investors should do their homework in advance as opposed to relying on third-party (and often biased) advice.
Establish a personal spending plan. Before investing, individuals should consider their ability to put money away. This includes ensuring they have enough capital to pay monthly expenses and have already built up an emergency fund. As enticing as investing can be, individuals should be mindful to meet their daily life obligations first.
Understand liquidity restrictions. Some investors may be less liquid than others, meaning it may be more difficult to sell. In some cases, an investment may be locked for a certain period and cannot be liquidated. Though not necessarily fine print, it's important to understand whether certain investments can be bought or sold at any time.
Research tax implications. On a similar note, though an investment can be bought or sold at any time, it may be tax-adverse to do so. With unfavourable short-term capital gains tax rates, investors should be mindful of strategies that extend beyond what product they hold and what tax vehicle they put that investment in.
READ ALSO » 10 Ways To Understanding And Investing In Digital Assets In The World
Gauge your risk preference. As mentioned earlier, investing incurs risk. This means you may end up with less money than what you started with. Investors uncomfortable with this idea can (1) reduce the amount they invest to only what they are comfortable losing or (2) explore ways to mitigate risk.
Consult an adviser. Many financial professionals would be happy to provide their guidance, let you know what they think about markets, and give you access to online platforms where you can invest money.
Return on Investment
The primary way to gauge the success of an investment is to calculate the return on investment (ROI). ROI is measured as:
ROI = (Current Value of Investment - Original Value of Investment) / Original Value of Investment
ROI allows different investments across different industries to be appropriately compared. For example, consider two investments: a $1,000 investment in a stock that increased to $1,100 over the past year, or a $150,000 investment in real estate that is now worth $160,000.
Stock ROI = ($1,100 - $1,000) / $1,000 = $100 / $1,000 = 10%
Real Estate ROI = ($160,000 - $150,000) / $150,000 = $10,000 / $150,000 = 6.67%
READ ALSO » 7 Benefit Of Investing In Real Estate.
Though the real estate investment has increased in value by $10,000, many would claim that the stock investment has outperformed the real estate investment. This is because every dollar invested in the stock gained more money than every dollar invested in real estate.
ROI isn't everything; consider an investment that earns a stead 10% ROI each year compared to a second investment that has an equal chance of earning 25% or losing 25%. For some, stable earnings outpace higher earning investment potential.
Investments and Risk
In its simplest form, investment return and risk should have a positive correlation. If an investment carries high risk, it should be accompanied by higher returns. If an investment is safer, it will often have lower returns.
When making investment decisions, investors must gauge their risk appetite. Every investor will be different, as some may be willing to risk the loss of principle in exchange for the chance at greater profits. Alternatively, extremely risk averse investors seek only the safest vehicles where their investment will only consistently (but slowly) grow.
Investments and risk are often strongly related to prevailing conditions in the investor's life. As an investor approaches retirement, they will no longer have stable, ongoing income. For this reason, people usually choose safer investments towards the end of their working career. On the other hand, a young professionals can often bear professionals losing money as they have their entire career to make that capital back. For this reason, younger investors are often more likely to invest in riskier investments.
