If you’re a new stock investor who wants to learn how to invest, you can follow these steps to get started with your investment plan. I’d like to thank Mike from ABCs of Investing for this informative guest article! If you like this post, please consider subscribing to his feed.
This is a quick guide to help you get started with investing — of course there is no point to putting money into mutual funds if you don’t have the rest of your finances under control so we’ll start with some of the more basic money management techniques and then get down to the fun investment stuff! If you already have your finances in order then skip right to the investment section.
One other thing to note is that a lot of the items I mention are topics to learn about — not all the answers will be in this guide. This is more of a roadmap than an encyclopedia.
How To Invest In The Stock Market
Step 1: Set goals. What are your financial goals?
Financial goals are usually improvements you would like to see in your finances.
There are short term goals such as:
- Be able to pay off bills every month.
- Save up for a small purchase or vacation.
And long term goals:
- Eliminate debt.
- Save enough money to retire.
- Buy a house.
For now, try to come up with fairly general goals without specific numbers, since they will come after you do some more analysis on your budget.
Step 2: Know thyself (or take a look at your finances).
The next step is to look at your current finances. This doesn’t mean a casual glance over to the pile of papers sitting on your kitchen table, it means a real close look at all your financial information.
Things to consider:
- How much income do you have.
- What are all your major assets? How much are they valued at?
- How much cash do you have?
- Do you have any investments?
- What debts do you have? Payments?
Once you figure out these items, you should be able to determine if you’re able to spend less than you make. If you’re spending more than you’re earning, then you need to make some changes — living below your means is a key step because you’ll need to have discretionary income in order to build up your savings and have enough to invest. Without a positive cash flow or savings to work with, you won’t be able to proceed with the remaining steps.
Step 3: Create a strategy.
Use the information from Step 1 and Step 2 (feel free to revise Step 1 at any time) to match your budget and cash flow to your goals. For example if you are saving $50/month towards your retirement and you have very little retirement savings — then the goal of retiring in the near future might not be realistic.
This step also includes taking a good look at your own numbers and determining what the next best steps are. If you have a lot of debt then maybe debt reduction should take priority. If your debt and spending are under control then maybe saving for retirement should be a priority. Only you can decide the exact strategy for you.
Step 4: Come up with specific action items.
The outcome of this step will hopefully be a specific budget, specific debt reduction goals (ie. pay off student loan debt in 3 years — or put an extra $200 into the mortgage every month) and/or actual saving goals (ie. save $300/month in your 401(k) to get the employer match). This is where you get into the nitty gritty of your budget and make decisions on the changes you are going to make.
Step 5: Get started with investing!
This step will only apply if you’ve determined from previous steps that you’ve got the money for investments, or if you already actually own some investments. One thing to keep in mind is that just because you aren’t investing now, doesn’t mean you won’t be investing later on, so learning about investing is always a good thing.
These are the things you should concentrate on as you ponder your investment plan:
Review your investment goals. What are your specific investments for? The concept of investment time horizon is very important — if you have a short term goal for your investments then invest in something guaranteed like a high yield savings account. If you are investing for the long term then owning more stocks is appropriate.
Determine your asset allocation. Asset allocation is also very important — that is basically the proportion of risky assets (ie. stocks) vs guaranteed assets (ie. CDs) in your portfolio. Your choice of asset allocation reflects your desire for safety vs growth (or how much potential return you’d like to achieve).
Summary
All these steps are a bit of work but that’s the way it goes. Once you learn the basics and get your finances and investments organized then it is very little work to maintain. Take your time, there is no rush.
Copyright © 2008 The Digerati Life. All Rights Reserved.
{ 16 comments… read them below or add one }
These are very good points and I think that is the right way to go about investing. Lot of people just jump into stocks and burn their fingers. That is partly due to not planning.
Thanks for putting up the post SVB!
Just a quick note – the site is for people who want to learn the basics of investing – it’s not really geared for stock pickers.
While starting Stock investments you really need to be cautious. Those are great tips for starters.
I’ve started putting my money under the mattress! Back to the drawing board.
Hi ABC’s,
I’m pretty new to the investing thing. I had a financial planner setup a program for me many years ago and have basically just kept everything the same since then. I put in a fixed amount each month and don’t touch it. One thing I was wondering is what your take on if I should be investing when I have other debts. My thinking (right or wrong) was that even though I do have some revolving debt, that I wanted to keep investing so that should anything happen, I have a place to draw emergency funds. I’ve read a few articles/blogs recently that tend to say because of the higher rates on many debts that a person is better off paying all debts, then investing. What’s your take?
Thanks
Joe
The financial goal part is very important. I often tell folks that investing is all about where you want to be in the future and how your future state relates to you money goals.
Here’s an example: If you know that you want to work until the normal retirement age (because you enjoy your job or maybe work as a teacher, policemen/women, etc.) then your investments can grow slowly (bonds, index funds, CDs/money market funds, etc.). Risk can also be dialed down in this scenario. The bottom line is to understand your money goals.
Here’s a blog entry on how to set financial goals:
http://www.scordo.com/blog/2008/11/how-to-set-financial-goals-and.html
Vince Scordo
Thanks Handy.
Des – now is the time to buy.
Austin – hard to say. I think it is a good idea to have some sort of emergency fund – even if that has to be your retirement savings then so what – better than nothing. So yes, I agree – I don’t think it’s usually a good idea to try to pay off 100% of debt before starting to invest (or just save).
Scordo – I agree. Just subscribed to your blog – it looks pretty good!
I have compeletly had it with the stock markets. I only trade Forex now. At least with that there is always one winner and one loser. When you trade stocks there could be five losers in a row or more.
Hi, I’ve been here before fellow Filipino. And so nice to see one with the same niche as the new blog that I started. Let’s all educate and eliminate poverty! By the way, hopefully, I can land a job abroad.
By the way, I also had an article on setting financial goals which is my very first entry to my blog.
http://www.millionaireacts.com/23/setting-goals.html
I do hope I can ahieve these goals. With the right attitude, discipline, hard work, and will power, I know I can do it someday. 🙂
Before any of this, I’d recommend learning how the stock market works in the first place. A lot of people think they understand but they probably don’t, there are a lot of good resources out there to help people learn what they’re getting into. 🙂
Just a note to say make sure as a new investor you realize the difference between investing in a volatile asset based market like stocks, and putting money into savings.
One will go up smoothly. The other will go up and down and around the houses, and you’ll *hope* you get there in the end! 🙂
The upshot is if you’re putting money aside for a new car or school fees or something else where you need a certain sum by a certain date, you’re better off with cash or *possibly* structured products (though I’d avoid them).
Equity investment is best when the need for the cash is far away, or when you will never need a specific lump sum (because you’ll be living off the dividends, say).
I had an article on “how stock market works”. It may be a good resource @ http://www.millionaireacts.com/404/how-stock-market-works.html
Some really useful tips here but learning how the stock market actually works can take a while to accomplish. I started off with the basic terms and began some paper trading before signing up for a broker account online.
Now I use stock picking software for my stock picks and probably wouldnt use any other system.
Financial planning is always needed. With smart planning we can make our retired days much more enjoyable.
Great post. I would like to add to the fact some of the newbie investors also suffer a problem from searching for the right broker. My personal experience with brokerage firms was bad and I truly appreciate if you can give me some pointers on how to pick a good broker.