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Beginner Guide to Investing

 

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Beginning Investing

Financial planning    Savings and investment vehicles

Common errors    Scams and frauds

Investing is just one aspect of personal finance. People often seem to have the itch to try their hand at investing before they get the rest of their act together. This is a big mistake. For this reason, it's a good idea for "new investors" to hit the library and read some overall guides to personal finance. Personal finance issues include making a budget, sticking to a budget, saving money towards major purchases or retirement, managing debt appropriately, insuring your property, etc.

Financial planning

" What if I would like to invest but I do not have any money ? "
Financial planning may help many people to overcome the lack of ability to save for investment. With proper planning perhaps you will be able to establish goals and save money to meet these goals.

To begin the financial planning process, you need specific financial goals. By specific goals, I mean to establish a date to meet the goal and a savings plan that meets your goals.
Next you need to track your expenses and income until you can develop a yearly statement (cash/flow statement). To see where you are currently, list the value of all your assets and what you owe. Subtract your debts from your assets and you have your current net worth (balance sheet).

Once you have established your income and expenses you can develop a budget. Your aim in establishing a budget is to attempt to increase your income and/or reduce your expenditures so that you have savings to meet your initial goals. If on the first try you are short of funds, do not despair.

Try looking at your taxes to see if they can be reduced. Consult a tax attorney if necessary. Analyze your debt to see if it can be consolidated into a lower interest rate loan. Perhaps a home equity loan might fit the bill. Next review your consumption patterns. Are your financial goals worth driving an older automobile; are you shopping for the best prices; and what current expenses that you have are unnecessary?

By getting your finances in order, you will gain funds to save and invest toward your goals. If you do not have sufficient funds to meet your goals, modify them. Look for opportunities in the future to reestablish these goals.

Savings and investment vehicles

When you just need to park your money someplace for a short time, it's better to consider short-term savings vehicles:

  • Savings account: Often the first banking product people use, savings accounts earn a small amount in interest (anywhere from 1.0% to 4.0%, often less)
  • Money market funds: Money market funds are a specialized type of mutual fund that invests in extremely short-term bonds. Unlike most mutual funds, shares in a money market fund are designed to be worth $1 at all times. Money market funds usually pay better interest rates than a conventional savings account, but below what you could get in certificates of deposit.
  • Certificate of deposit (CD): This is a specialized deposit you make at a bank or other financial institution. The interest rate on CDs is usually about the same as that of short- or intermediate-term bonds, depending on the duration of the CD. Interest is paid at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest payments. CDs offered by banks are usually insured.

A much higher return on your money is given by the long-term investing vehicles :

  • Bonds: They're known as "fixed-income" securities because the amount of income the bond generates each year is "fixed," or set, when the bond is sold. From an investor's point of view, bonds are very similar to CDs, except that they are issued by the government or by corporations instead of banks.
  • Stocks: Stocks are a way for individuals to own parts of businesses. A share of stock represents a proportional share of ownership in a company. As the value of the company changes, the value of the share in that company rises and falls.
  • Mutual funds: Mutual funds are a way for investors to pool their money to buy stocks, bonds, or anything else the fund manager decides is worthwhile. Instead of managing your money yourself, you turn over the responsibility of managing that money to a "professional."

Common errors in investing

You can save a lot of money, time and anger if you learn from the mistakes that individual investors use to do :

  • Believing that you can time the market (i.e. pick market highs and lows).
  • Building a portfolio without an investment objective.
  • Buying too many mutual funds.
  • Buying the hottest {stock, mutual fund} from last year.
  • Not researching a one-product stock before you buy.
  • Taking profits too early from your investment.
  • Not cutting your losses.

How to avoid investment frauds

Before thinking about an investment plan, you should know how to protect yourself from "magic opportunities". You can find many tips about protection in these pages :

Other resources for information to help you make wise investment decisions include:

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