This is the second post in the Intro to Investing series. If you missed the first one you can check it out here: Intro to Investing: The Basics
In the previous post, we discussed the basics of investing and some details you should consider before taking the next step. In this post, rather than telling you what to do, I’m going to simply explain how I got started investing and discuss the process from a high-level. After that, I will leave you with 5 investment philosophies you should think about. Enjoy…
First, I had to pick a brokerage. Since you need a license to buy stock and a platform on which to trade, which one usually has neither on their own, you must use a broker or brokerage firm to buy the stock for you. You’ve probably heard most of the big names before: E*TRADE, Scottstrade, TradeKing, TD Ameritrade, Fidelity Investments, Charles Schwab, and many other qualified firms. These are all certified, licensed brokerages who can buy stocks and other investments for you. Now, unfortunately, all these firms have what’s called “trade commissions.” A trade commission is a fee that they charge for every trade you make. Some can be as low as $3 and as high as $20. As you can imagine, those add up quick when you’re trying to buy and sell stock. On top of that, most of these brokerages require you to have a minimum balance in your account. Tough for a newbie to meet the standards, I know firsthand.
To avoid these excess fees and be the experimental millennial that I am, I decided to go with the mobile brokerage Robinhood. Robinhood has revolutionized the brokerage/investing industry in that they don’t have a minimum balance requirement, nor do they have any commission fees. Perfect… I researched Robinhood to oblivion before I decided to go with them. Robinhood was founded just a year before I hopped on board. I have been using them ever since and have not had any issues. In fact, quite the opposite. They have been continually adding more and more features that make their online trading experience even better. For more info on them, check them out here: Robinhood.com
Second, I had to decide how much I wanted to invest. Word of advice: budget your net income (gross income – expenses) by percentages, not specific amounts. When I did it this way, I was able to set aside a bit of money each pay period to invest rather than trying to throw around random lump sums. No joke, when you budget your net income by percentage, it is far easier to allocate and handle.
FAQ: How much should I start with? Answer: There’s no magic number to start with simply because you’re going to want to be investing more and more over time. Make it a point to budget.
Third, and perhaps the most important, I had to decide what to invest in. I’ll be honest, I was kind of an idiot when I first started. I didn’t have any goals or strategy, aside from I just wanted to invest and make money… Just like everyone else. The saying is true: “a goal without a plan is just a wish” – Antoine de Saint-Exupery. This is where we dive in.
So… let’s talk philosophy. After you’ve planned out which brokerage you want to use and have decided how much you want to invest, it’s time to think about strategy. BUT! Not so fast… When I first started out, I tried to do too much, thinking I knew more than I actually did. Well I learned a lot not just from experience, but from other investors, books, speakers, history and even the fools out there. The more I learned, the more I thought “wow, I was dumb.” You’ll have these moments, but don’t lose heart. I’ve taken the liberty to share these next few things with you so you can avoid unwanted experiences.
Before we get into investing strategies, I think it’s more valuable to discuss investing philosophies, which are the guiding principles to your investing decisions. Take heed of these philosophies and, if done correctly, you’ll have a good, long, investment strategy:
1.) Do your homework before you invest! If you were to lend someone money to start a business, wouldn’t you want to know their plan for how they’re going to make money and be able to pay you back? It’s the same when it comes to investing in stocks. Research the companies you’re interested in, learn about their plans and strategies, take note of how they make their money, find out their current financial position, find out who they are before you give them you’re money. This leads me into my next philosophy…
2.) Only invest in companies you believe in. Take this one personally. Legally, when you buy stock, you are becoming a partial owner of that company. You have a stake in that business. Consider what you want to associate yourself with. Although you may think it’s just a stock and it doesn’t matter, you are still identifying with that company, condoning and supporting their business. So, if you don’t support the product, the people, the decisions, ethics, or whatever is important to you, I wouldn’t buy it. This is why I say to invest in a company that you can feel good about.
3.) Do not expose yourself to more risk than you can financially handle. Every stock has an element of risk, but not all are alike in their risk factors. So don’t risk more than what you’re okay with… In the case you didn’t know, penny stocks are usually penny stocks for a reason. Although you may be excited to buy low and sell high for some fat gains… it may well be the opposite. Which leads into my next philosophy.
4.) Does the company pass the VHPS test? (A little stock assessment tool I thought of). Ask these four questions before investing: What value does the company create? Is the company in good health financially & internally? Am I buying this company at a good price for what it’s worth? Is this company sustainable (through good times and bad)? This can help guide you with #1. If you are comfortable with all of the answers that you’ve arrived at from your diligent homework, you’ve found a candidate.
5.) Never trade on fear / speculation. There is a lot of misleading news out there that will swing a stock or even the market one way or another. Don’t trade with your emotions, this is how people lose money. You’ll need to know how to see through the smoke and see the light at the end of the tunnel. You will learn this last one over time, not overnight. Know the facts my friend… Just remember, truth always wins in the end.
This was a lot, I know, I’m sorry… If you’ve read this far, nicely done, you must be serious about investing and ready to dive in! Next post, we will be discussing strategy and how you can develop your own! Not only that, but I’ll explain my personal investment strategy.
In the meantime, consider investment philosophies and read about guys like Warren Buffet: Warren Buffett – 41 Fascinating Facts about Life & Investing Philosophy: The Lessons From A Legendary Investor
Cheers & God Bless,
Disclaimer! The views expressed in this blog are my own opinion from my own research and experience and do not necessarily reflect those of any of my educators/employers, past, present or future. I am not responsible for the actions and decisions you may make when it comes to saving/investing.
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