In today’s world, investing is not just an option but it has become a necessity. Millennials are starting to invest more than any other previous generations.
Due to the spread of the coronavirus pandemic and the resultant lockdowns, many online applications & businesses have seen recent growth. Online investing apps & brokers have also seen a lot of interest & growth in numbers among new investors.
These days most investment options are available on online trading apps. An online investor now has the option between a large number of financial instruments such as stocks, commodities, forex, cryptocurrencies, mutual funds, bonds and so on. The investing apps like Robinhood, E-Trade, eToro, Plus500 are getting attention and are reporting fast growth.
However, there is a high risk associated with investing in the financial markets and new investors need to be aware of that. They need to be vigilant and know how to assess the risks and mitigate them.
Here are the ten important things that every new investor must know before they start investing:
Education is must before Investing
Before you take the plunge into the world of investing, you need to know the layout of the land. It is essential that before you risk your money, you know the kinds of risk associated with your investment.
You also need to know how the financial instrument or product that you are investing in works. For example, if you are planning on investing in stocks, then you need to what stocks are, how to analyse stocks, and how the stock market works.
There are several general books available on investing as well as books, online guides that cover specific areas of investing like this forex trading guide on market basics that covers beginner FX terminology, investing and stock market guides on Investopedia.com are also good starting point for new investors to understand the investing basics. It is recommended that you start with these.
One must never invest without proper knowledge of the instrument, its risks & the financial market understanding.
Setting an Investment Goal is Important
You need to approach investing systematically, and the first step to doing so is to set an investment goal. An investment goal will tell you how much you expect to earn from your investments over a given period of time.
Remember to set an investment goal that is achievable and realistic. Before you decide on a goal, look at the rate of returns that the financial instrument of your choice has been delivering over the last few years and decades.
Always choose an Investment Option that Suits Your Needs & Knowledge
Financial instruments such as stocks, cryptocurrencies and forex can give you a much higher rate of returns. However, they are also much riskier investments than government bonds or fixed deposits.
You need to know the ins and outs of the industry and instrument in which you are investing like for example – most brokers offer Forex as a CFD, which is a very complex investment instrument to understand and require years of experience and is often used for short-term speculation rather than investing long-term.
Risk Assessment should be done Before Investing
Almost all investments are subject to market risk. Hence, if the market loses value or there is an unforeseen occurrence, then there is always a possibility that your investment could become worthless.
Hence, you need to do a proper risk assessment before investing any money. For example, if you are investing in real estate, then you should be aware of the demand for real estate in that area and why that demand exists. You should also consider the factors that could lead to the demand falling.
Only Invest in Financial Products You Understand and Believe In
Financial instruments can be complicated, and almost no investor understands every kind of financial product. It is not advisable to invest in an instrument that you do not understand or believe in. This is because you will not be able to understand the risks that are associated with a financial instrument without understanding it.
Not ever Investment Will Pay Off
Even the best investors in the world have lost significant amounts of money at some point or the other. As a rule of thumb, you should never invest money that you are not prepared to lose. Investments in the financial markets are risky by nature, and no investor has been able to successfully predict the market every time.
Hence, always be mentally and financially prepared to lose a significant amount of your investment or your entire investment altogether. Do not invest more money than you can, in order to guarantee your financial security.
Do Your Own Research
Investment advice is not always reliable and you need to be aware of the factors that you are relying on to make an investment decision. An investment advisor could be relying on factors that you would not trust had you known about them.
Diversify Your Portfolio and Always Invest for the Long-Term
These are two key rules of investing. Diversifying your portfolio is essential to guard yourself against market risk. If you are a stock investor, then you should invest in several different types of stocks in different sectors.
Hence, if a certain market sector crashes or a company goes bankrupt, you do not lose all of your investment. It is even better to invest in different types of financial products such as mutual funds, commodities, cryptocurrencies to further diversify your portfolio.
Also, you should keep the long-term in mind before investing. This is because investing in a financial product for the short term is closer to speculation. You are more likely to lose your investment if you are speculating on the market.
Even if you do not immediately get positive results from your investments, it is important to be consistent and develop a habit of investing. If you are consistent, then it is much more likely that your investments will pay off.
You do not have to start big or invest a lot of money. It is better if you invest small amounts of money, but do it consistently.
Over a long period of time, you will find that your investments have grown and your ability as an investor has grown as well.
Monitor Your Progress but Do Not Obsess About It
Keep a check on all your investments. This will help you keep track of how your investments are doing. However, do not obsess over your investments or frequently change your investment strategy. All investments are susceptible to short term volatility in the market. This should not affect your investment decisions.
You will not be able to sustain yourself as an investor if you obsess over short term losses caused by such volatility. Hence, keep your emotions in check and don’t be disheartened. Instead of being sentimental, use strategy and analysis to guide your decisions.