Investment 101: 7 Rules to know before you start investing
Start investing, buying and selling shares, taking profit, working from home, and becoming a trader – all this is pretty attractive. And once you add the success stories of Warren Buffet, Benjamin Graham or Peter Lynch the attraction grows even bigger. But be mindful that there are people extremely successful as well as there are those (in fact many more) who did not reach the same highs and history doesn’t always mention those.
So before you start investing, you might want learn 7 rules you don’t want to miss in order to join the successful crowd. When scrolling down to the individual topics below one may think: “Ah, these are all so clear and intuitive, I know them… What’s the point of reading them?” I might agree with the first half of the sentence, but not so much with the second one. Because, they are so intuitive and clear, they can easily be forgotten and overlooked. And this is already a first step to be careful about. Don’t underestimate the importance of repetition, after all it is a mother of all wisdom.
And why not minimize your losses right from the start?
RULE no. 1) Keep your finances under control
Some might think - a cliché that has been repeated many times. But if you don’t have money under your control right now and you live your life from one wage to another, please do not expect your investments to make you rich overnight.
You will run into much more painful situation then learning to control your money now. Remember investing is like a marathon, not a sprint. There are many bumps and falls, and certainly it will make you feel to quit many times, but patience is a virtue! If you are determined to start trading and investing, don’t quit your job as yet, instead control your finances day to day, build your financial cushion, calculate how much money you need for your food, cloths, entertainment for your direct debits. The more details you make the better for your plan…. Think how much you need to support yourself for a month? Than multiply it by 12. This is your figure and essentially your bridge to get you to the other side to start investing full time.
From my own experience being a financial coach, and helping people restructuring their own finances, I often find this is the key step and “base stone” to build your own financial stability and your success. If you don’t know which way your cash flows now (in and out), don’t rely that trading will magically sort it out.
RULE no. 2) GOALs and Planning
Set yourself a realistic goal. Start putting your money aside. Your goals should not only target when and how to start investing, but should more importantly cover your personal plans. What will you live from if your investments go down or if you don’t make any cash for some time? To be disciplined and stick to your goals is the essential part of every successful investor.
RULE no. 3) SAVINGS and SAVE MARGIN
Even if you don’t plan to start investing or trading immediately, you should continuously create a financial cushion that is available to you when you need it the most. Many people after they make their first money from the trading they fall for the wrong impression of being able to afford more. Consequentially they increase their spending and only in case there is something left at the end of the month they put it aside to their savings. And for worse they leave it on the current account only, where there is no interest. That’s not the way to do things. In fact, it should be other way round. Put some money aside immediately when you get your pay. Don’t touch it and select the tool that generates some interest to compensate for the inflation. Already ancient Babylonians had a rule to put 10% of their earnings aside. And they knew what they were doing. You save in the good times so that you have something for the bad times.
The truth is that majority of people spend what they earn. It doesn’t matter if they earn 1000 or 5000 pounds a month. The more we have the more we spend. We fall for the feeling we can afford more luxurious things and move up the social ladder, and that’s when unnecessary emotional spending kicks in. I challenge you to try instead to look around and take a good example of those who manage to be tight on the budget despite their income doubled or tripled. Those are the real winners to take example from!
RULE no.4) INVEST to your education
The very first investment you should make is actually to your knowledge and education. Don’t rely only on getting investment knowledge from magazines, discussion forums or even financial advisers. Those people are people driven by their own interests. Often they are pushed to sell you their own financial products that might not be suitable to you at all. Make your own judgement, think about things around you, look for answers and learn how to ask the right questions. Investing to your own education is something that make a return to you in multiple ways.
RULE no.5) AVOID so-called-experts, tipsters, and “proven-ways-to-get-rich-quick”
If you are serious about investing, avoid people that will discourage you, but also those that will push you to invest too quickly! It is your money and your decision! Do it and do it in your own terms. Be prepared to hear lots of stories how investing is unstable, and risky, or in contrary how to make a guaranteed profits, risk free money investments or get 100% secure tips on trades to make. Nothing is at 100%, there is no risk-free investment, bear this in mind as well as the fact that history never repeats. Nobody can with certainty predict what will happen next day on the markets or in a month or even a year. To name one example that speaks for all: Look at the government bonds. Those are generally perceived as secure and low risk instruments. Now a few years later what happened to those instruments in Greece? The Greek government bonds can’t be more distant from being secure and low on risk!
RULE no. 6) LEARN different types of investments and USE them!
During your studies you will come across to many types of investment instruments: Shares, Commodities, Investment ISAs, Financial Spread Betting, Investments trusts, Unit Trusts, Options, Futures, Foreign Exchange (FOREX), Gold, Real Estate, and many other types [LINK].
The truth is that you might not need detailed knowledge of all of them, but it is essential to have at least general overview what is out there. The reason is that you can better decide what works for you and what doesn’t. What tool fits better to your condition, time and risk tolerance? Every trader will recommend you what works the most for him, but you should find the tool that really works for you. Learn from others, use it, but eventually find your own way. The best way to learn without losing any money is paper trading and that brings us to the last point:
RULE no. 7) PAPER TRADING
I think this is one of the most neglected but extremely useful techniques when it comes to starting trading and investing. Most probably it is because it doesn’t carry any risk, loss nor any profit. This is simply a virtual trading. Your prep-school for the real world before making an action. Almost like a fitness before you run in the competition. You select your trading instrument, make a note of it and pretend buy and sell, and calculate how much you would make. The good thing is that you learn about your behaviour, your reactions and your judgement. You can start paper trading anytime and anywhere, you can see how much money you would make or lose. Start as early as possible and make a note every time! Feel free to use one of the templates here or try to download some application. It is the most optimal method to learn how markets work, what are the laws and the signals to recognize.
That’s it. Finally, investments should be really more of a hobby for you at least at the beginning. Enjoy it, and learn as much as you can – after all it is a new skill you want to master.
And remember if you skip at the beginning what you ought to pay attention to in the first place, sooner or later you will realize you need to go back and review those exact steps. Hopefully it will not be in the moment when you make some loss and panic how to get your money back.
Take care and start investing exactly when you feel you are ready to! As with many things, you can do it and it is only up to you how successful you will be.