Aug 15, 2022 - Stuart Mooney
These days the buzzword or phrase on everyone's lips is passive income. That is, a way to make or grow your money without labor and minimal effort. An excellent method to earn a passive income is to invest your money. While investing in stocks can be risky, investing your money wisely will allow it to grow without you having to do anything.
To invest successfully, you must be strategic, and to that end, there are a few things you must be aware of and consider:
Think about why you are investing. Common reasons people invest are so that they will have enough money to retire, but you must also consider other financial goals. These can include both wants and needs. Some examples of wants and needs could be to have enough money to travel the world and to buy a new house.
Apart from determining your goals, it would help if you had a timeline regarding when you will need the funds, as this will influence where you invest since some investments will require you to leave the money in the investment vehicle long-term to see growth.
There isn't a guarantee that you will make a profit on your investment, so it is essential to figure out your risk tolerance before you invest. Your risk tolerance is how losing your money will affect you. If you have a high risk towards tolerance, meaning you won't be negatively affected if you invested in a stock that dropped in value, then you can invest in a fund that offers high returns, which is also much riskier than other investments.
For example, you may choose to invest in mutual funds that provide high returns but are risky instead of unit trusts or FDs that give lower returns but are less risky.
Often, investments that are high risk are also high reward, so you need to be aware of your risk tolerance, and if your risk tolerance is high, it is worth taking a calculated risk.
Some financial institutions have a minimum amount you must deposit to open an investment account, while others allow you to invest as little or as much as you like. It is good to have an idea in mind of how much you'd like to invest and decide if you would like to make a lump sum investment or pay in monthly installments.
You may also decide to do a combination of both. That is, invest a lump sum, for example, $1000 when you open the account, and then make monthly installments of $300 after that.
It's always worthwhile to start investing as early as possible to benefit from compound earnings, but it is never too late.
After figuring out your risk tolerance and deciding on an amount, the first step to investing is understanding your options. Some popular investments include:
A bond is an amount you invest that is a loan to a company or the government that you earn interest on. You will be paid back the amount you invested plus interest within the agreed-upon years. Bonds are less risky since you know when you will be paid back and how much you will earn in interest, but they are less profitable than other investment vehicles.
A mutual fund is a combination of different investments that are brought together. For example, a mutual fund can consist of a mix of stocks and bonds, allowing investors to have a diverse portfolio.
Stocks are also called equities and are a share of ownership in one company. Companies issue stocks to raise money to grow the company or to fund operational needs. As the company grows and becomes more profitable, shareholders may earn a return on their investment.
Before investing your hard-earned money in the stock market, you must do your research.
To research stock, follow these steps:
When you have found a stock you are interested in buying, you must review its financials to see how they are currently performing. You can find valuable information in the following documents that all listed companies must file with the SEC (Securities and Exchange Commission):
You can also find information on the EDGAR website (Electronic Data Gathering, Analysis, and Retrieval).
The forms and website mentioned above provide a ton of information that can be overwhelming and unnecessary. To help you narrow down your focus, look for the following:
After considering the facts, or quantitative information, it is helpful to look at qualitative information. Consider the industry the business is in and if it is a growing one. For example, online shopping and streaming services have seen a rise in demand since the pandemic and are likely to continue to grow.
Also, consider whether the company has a competitive advantage or if the business they're in is easy to copy.