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How to invest: 5 basic tips for beginner investors in stocks

Investments for beginners

The development of technology has increasingly paved the way for ordinary people to global financial markets. But easy access for individual investors to international markets comes with the need to be educated about them and to understand the risks they take.

1. Do your homework

Once you have decided on which platform you want to invest, you have to do your homework. Investing means more than choosing a few random shares, with the hope that everything will go well on its own. A familiar example would be that when you buy a house you do not choose one at random from advertisements, but you will go to visit it. And to determine if it has a fair price, you look at the neighborhood, the real estate market in general and then you make a decision.

Similarly, before you start investing in stocks or any other asset class, you need to research the market to understand what you are investing in. Read about each asset and invest only when you feel comfortable that you can make a well-informed decision.

Thanks to the internet, nowadays it is easy to access information about listed companies. You can see what their income and history are, you can read their news and recommendations for investors. Sector or market information or even political news is also important – for example, we can now see how airlines, even the best performing ones, are affected by Covid-19 travel restrictions or how incentive packages economically affects markets. Being up to date with things that happen in the media helps you better understand the evolutions of stocks and trends in the markets.

2. Define your financial goals

Before you invest your money, you need to have a clear idea of what you want to achieve and how you will do it. You need to understand your personal goals as an investor. Do you plan to invest in the long term (10 years for example) or in the short term? What types of investments will help you achieve your goals? What are you ready to risk?

Investors should be encouraged to define an investment strategy that suits their needs, including their risk attitude. To mitigate risk, they should diversify their portfolio, adopt a long-term attitude and invest only in financial instruments with which they are familiar and for which they understand the risks they take.

3. Invest the money you don’t need in the next five years

Risk appetite should always be linked to investment objectives. Evaluate your current financial situation to understand if you can take the risk and always invest with money you will not need in the next five years. Never invest more than you can afford to lose!
You need to have a long enough time horizon for the investments you make to avoid market fluctuations. If you have an amount at your disposal, but you know that you will need this capital in the next 12 months, then the recommendation is to invest in a less volatile asset class, such as bonds.

Over time, stock markets have provided excellent returns to long-term investors. For example, since the establishment of the S&P 500 index (stock index composed of the top 500 American companies) in 1926, it has increased by an average of 10% annually. This is a much higher return than those generated by other assets, such as government bonds. You can also start investing in shares with a relatively small amount of money using a commission-free platform, as commissions can affect your profit margins.

One of the factors that discourages people from investing online is cost. The idea is still widespread that you need a lot of money to start investing. Moreover, equity investments are often perceived as an extremely complex process, involving technical knowledge and attracting expensive commissions. This is no longer the case. A number of online investment platforms, conduct transactions with shares without commissions, as well as fractional shares – you can actually buy a part of a share, a percentage of it, expressed in dollars. This offers the opportunity to invest $ 50 in high-value stocks, such as those of Amazon (which trades at about $ 3,000 per share), Tesla (over $ 700) or Alphabet (Google) – whose shares would cost about $ 2,000 a piece.

4. Practice before you start investing

Start with small amounts of money or practice with a virtual demo account, while learning the markets and defining your strategy.
Demo accounts of several online platforms allow you to practice without risk. Every user who registers receives access to a demo account, credited with virtual money, so that they can practice their strategies, learning to work with the platform before investing with real money.

5. Diversify your portfolio

Diversification is a risk management strategy and the proverb “don’t put all your eggs in one basket” explains the concept very well. In other words, invest in different assets or market shares to limit your exposure to a certain class of assets or financial instruments.
The purpose of diversification is not to achieve very high returns, but to manage risks. Think about what it would have been like if you had invested all your savings in the shares of an airline company just before the pandemic, which made travel difficult. You don’t want to be completely dependent on the performance of a single company or a single sector, maybe even the economy of a single country or continent.

6 tips for improving your family budget

Family budget

In order to be able to draw up a budget of incomes and expenses as accurately as possible, it is best to keep our daily records of spendings so we don’t omit anything. That’s why we can use more tools, either to write daily spending on an agenda at the end of each day, or to use an app on your mobile phone that you have at your fingertips at any time, and we can write down the expenses as we perform them, either use an excel file, so we can personalize it to fit our needs better.

  •  A great deal of daily spendings goes on various occasions, such as snacks during the day or city walks to a coffee. Do not omit to keep track of these costs because at the end of the month you will realize that they will weigh heavily in the budget and you will wonder where the difference is.
  •  For a better financial discipline, it is a good idea first to achieve a forecasted revenue and expenditure budget and then to draw up the budget actually made to figure out what is the difference between estimates and reality, and so you can improve your financial behavior. The forecasted budget can also be considered a target for your budget and try to fit into it.
  • Every month, the first expenses we have to make are the ones for our future, this are the sums allocated to savings and investments. After making sure that we first saved the amounts proposed, we can only then make the fixed costs that if we omit them in a month they will attract interest and penalties. Finally, we can allocate the difference for variable expenses.
  • As with fixed costs, to ensure that we do not postpone savings by the end of the month to see if we still have resources available for them, we can set automatic payments to our savings or investment accounts and so we will have better and better financial results.
  • To ensure that unforeseen expenses do not affect your monthly budget, it is advisable to have an emergency fund of at least 3-6 salaries that you can use only in emergency situations. This way, you will surely know that no matter if your car breaks down or you have an urgent medical problem, you will be able to resolve it without borrowing or delaying until you have the financial resources to solve the problem.
  • To improve spendings, try to divide them into expenditures that represent needs and expenses that are wishes. Start budgeting all the time by analyzing your wishes and see which ones can be eliminated for better long-term results.

Ultimately, the purpose of our revenue and expenditure budget is to manage our financial resources more efficiently. It is important, after realizing the family budget over a period of several months, to analyze its evolution in order to improve our financial behavior in terms of cost reduction in order to save more and ultimately invest in order to reach our established financial goals more quickly.

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