If you have never invested any of your hard-earned money before you may be wondering where to begin. Perhaps you have received a stock tip from a friend or family member that seems like such a sure thing you wish to invest every penny that you have. But is this the wisest of ideas? If the returns don’t pan out as expected you could be left with nothing to show for your efforts. Here are a few things that investing beginners should consider.
If you are considering investing in stock, the best way to minimize the risk that you are exposed to is to invest in more than one stock. It is the classic story of not putting all of your eggs in one basket. The more diversification that you do, the less likely you will be severely hurt if one stock has a meltdown and crashes badly.
However, keeping track of all your investments if you invest in 15 or 20 stocks will take a lot of time and effort. If you do not have this time to spare, then consider investing in mutual funds. The responsibility of the diversification for these falls on the fund managers. There are different types of mutual funds that you can place your money into as well. Consider one that focuses on larger blue-chip performers as well as one that invests in international markets, as an example, as a way to spread out your money into lots of different areas.
Asset allocation is another term that you should know about when you are considering investing. Outside of stocks you may consider investing in bonds or money-markets. Each of these types of investment offer a different risk to reward ratio. Out of these three options, you will gain the greatest possibility of return when investing in stocks. However, they also offer the greatest risk of loss too. Alternatively, bonds are not as lucrative as stocks, but their volatility and loss risk are much lower. Thirdly there are the money-markets where you will never lose your initial investment, but you are not going to be laughing all the way to the bank either. When you employ the strategy of investing through asset allocation, you take into account your long term goals and how long you have available to see the returns the desire. If you seek short term rewards, then investing heavily into stocks is the best way forward. However, if you have a longer term financial goal in mind, then you can afford to diversify more among the three types.
Now that you have a more solid knowledge of the basics of investing, you should give further thought as to how you are going to spread your money around. Make sure that you find that line between risk and return that you are most comfortable with and stick to your plans. Don’t be tempted by get rich quick schemes as they rarely pan out to be a viable plan. Instead do your research, invest wisely and watch your savings grow as you march into the future.