How to Begin
As an individual, several paths are available for choosing and making your investments:
- Being a self directed investor. You can do your own research — using the newspaper, annual reports, prospectuses, books, financial websites, and other media — then make your own decisions about what funds or stocks to purchase. You can then use a discount brokerage house or an online brokerage to place trades.
- Investing with a help of your bank or broker. Another option is to consult your bank or your broker for getting advices before investing and trading. Banks and full-service brokerages employ licensed stockbroker. They may not only handle your market orders, they also can help you choose your investments.
- Consulting a Financial advisor. You may also turn yourself to professional financial advisors. They will, for a fee, help you personally decide where and how to invest. According to your needs, they can help you determine not only how to invest, but also what your insurance needs are, what your family budget should look like, how to make tax planning our set up your complete statement or personal finance. These financial advisors may charge a commission on each investment they handle for you, or they may charge you an annual fee that is a percentage of your total assets under their management, or a combination of the two. In all cases, they must give you the detailed amount of their commissions or fees in a written and signed document, before any decision you may take in investing.
Your Investment Financial Plan
Whether you seek the assistance of a professional or choose to go it alone, you need to determine your objectives and establish an investment plan. How people invest, however, differs greatly depending on their income, their goals, their age, their personalities and other factors.
To develop a plan, you need to assess your financial situation and goals: How much money do you need for routine expenses, such as food, housing, clothing, health care, transportation and entertainment? How much have you set aside for emergencies, such as accidents, illness and unemployment? And how much do you need to save for important and predictable expenses such as housing, scholarship expenses for your children and retirement?
Risk-Reward Relationship: Choosing Investment Vehicles
Your ability to assume risk is crucial in determining your investment strategy. Do you want your investments to grow slowly but steadily over several decades? Or would you rather have the chance to earn more money right away but take more risk that you could also lose money? Most investors seek a balanced portfolio containing a combination of securities — a mix of equities, bonds and monetary assets.
Bank saving accounts, certificates of deposit and monetary assets are low-risk and low-return investments. They are especially appropriate for short-term or medium-term investments, for when you are going to need the money anytime from this week to a year or two from now.
On the other end of the spectrum are high-risk investments, such as buying small, lesser-known company stocks or low rated, high-yield bonds. These investments usually pay a more attractive return or yield than safer investments, such as blue chip stocks and high-grade bonds. However, higher-risk ventures mean a greater likelihood of investment loss.
For longer-term investments, several years or more, the stock market as a whole tend to give the best rates of return. As with all investments, a higher amount of risk generally means a greater potential return.