How to invest money: An investment guide

How to invest money? You probably heard that you will be financially independent if you invest in stocks, real estate, etc.

This is true. If you invest your money into something that generates returns whether big or small; you will eventually become financially independent.

The biggest question you will need to answer is: How to invest your money? Once you get the answer to this question, everything will become simple and straightforward.

In this article, you are going to learn how to invest your money in 11 steps no matter what you choose to invest in.

Table of Contents show

What is investing?

In simple terms, investing is the allocation of funds into assets and other securities hoping to get a return form them in the future.

The investment strategies you use will depend on the amount of money you have at your disposal, risk tolerance, etc. For example, if you have a small capital, you can buy a few shares of your favorite dividend-yielding stock.

In this case, you will collect dividends quarterly or yearly and benefit from the stock price increase. Over time, your portfolio will have steady growth.

The primary benefit of investing is to receivin a return from your investment. The more return you receive, the faster you achieve your financial goals.

Before you get too excited about investing, you must remember that there are risks associated with every investment.

Your risk will depend on the economic condition, your risk tolerance, and the amount you have invested. Because of this reason, you must use proper strategies in your investment journey. Otherwise, it will be difficult for you to achieve your investment goals.

Now that you know what to expect from investing, it is a time you learn about how to invest your money.

Step 1: Decide why you need to invest your money

The first step in your investment journey is to decide why you need to invest your money. This is like a goal or a reason you need to get out of your comfort zone.

Your investment goal will shape the investment strategies you use and how much risk you will be taking. If you want money for your retirement, for example, putting your money in low-interest investments such as a 401k or a traditional IRA could work better in your case.

Step 2: Decide your investment horizon (Short-Term or Long-Term)

You can have a long-term or a short-term investment options depending on your choice.

If you want to use your money in the near future, a short-term investment could be great for you. For example, you may want to use the money as tuition for your children or use it for a downpayment on a house.

In this case, you could invest in short term investment options with fewer restrictions such as savings account, CDs, stock markets, etc.

On the other hand, you can pursue long-term investment options. This choice will be great if you don’t need your money in the near future. The IRA, bonds, 401K, etc could be your best long-term investment options since they are less taxed and provide you with more benefits.

You must understand that once you put your money in such investment options, you will pay an enormous tax and charges if you choose to get your money out before the maturity or retirement date.

Step 3: Determine whether you need help or if you will do it yourself

Investing is not something you can do randomly and succeed. If you throw your money into the stock market, for example, hoping to make a profit; you are no different than a person who is betting thousands at a casino.

The knowledge of markets, investment strategies, and more than basic investing theoretical knowledge come in handy when investing.

If you have decided to invest, you will need to know how much help you need in your investment strategies. Do you have what it takes (knowledge and experience) to invest? If so, you can make your investment decisions without hiring an investment advisor.

On the other hand, if you don’t have the knowledge and experience needed to make proper investment decisions; you must have an investment advisor to help you. The level of help you need will be determined by you.

There are many ways you can work with your investment advisor. For example, you can let him/her help you decide securities and assets you need to buy or sell at a particular time. Your investment advisor can also have 100% control of your portfolio and report to you every month or quarter.

Step 4: Know your risk tolerance

Your risk tolerance will be very important when determining the money you will invest and how long your investments will last.

In short, your risk tolerance is how much risk you are willing to take in order to achieve your financial goals. For example, let’s assume that a stock you want to invest in is trading at $30 per share. You think that the stock will move up and reach $65 in the next 12 months. Since this investment sounds great, you decided to buy the stock at $30 per share.

Because you are not sure 100% about the direction of the stock, you decided to set up a stop-loss order at $25 per share. If the stock price does not move in the direction you anticipated, your stop-loss will be converted into a market order when the price reaches $25 per share. In this case, your shares will be sold at the best market price possible.

This example tells you that you are willing to lose $5 per share to make $25 share on that investment.

Your risk tolerance in this case is $5.

Your risk tolerance will determine how much you are willing to lose to achieve a specific return.

If you are confident about an investment, you can have a higher risk tolerance and vice-versa.

Note: Always know how much you are willing to risk on an investment before investing.

Step 5: Decide where to invest your money

At this time, you are going to decide where you will need to invest your money. There are a lot of investment options to consider.

Your risk tolerance, investment time frame, and investment goals will help you determine where to invest your money.

For example, if you are OK with the volatility in the market, you can invest in the stock market and other volatile securities such as currencies, ETFs, etc. On the other hand, if you are not OK with volatility, you can invest in less volatile investments such as high yield savings accounts.

The following are some examples that can help you know where to invest your money.

Individual retirement fund (IRA)

401k: If you work somewhere, you can build your wealth through a 401K. Your employers can help you reach your financial goals faster as they match your retirement contributions.

Savings account: A Savings account is a great way to protect your funds and earn a small return at the same time. Banks, credit unions, and investment institutions offer savings accounts. The small return you receive will not make you millions of dollars, however, it will help you cope with inflation over time. Furthermore, you can still transfer money in and out of your savings account. This is why a savings account is better than a checking account.

Certificate of deposit (CD): Certificate of deposits (CDs) are great investment options. They are more secure and not volatile. In addition, you will earn a small fixed interest on your deposit. The bad news is that the interest you will earn from a CD is small, and therefore, will not make you reach fast. However, putting your money in CDs will be a great option compared to keeping your money in a checking account where you earn nothing.

Money market accounts: Money market accounts are issued by banks and other investment institutions. The account offers better benefits compared to savings accounts. However, money market accounts have more restrictions compared to savings accounts.

Mutual funds: Mutual funds will give you great returns and your funds will be managed by an experienced money manager. Keep in mind that you will pay them a commission based on agreed up terms. For this reason, your returns will be greatly affected.

Exchange-traded funds (ETFs): ETFs are a type of funds that are traded on stock exchanges just like stocks.

Stocks: You can buy individual stocks form publicly traded companies. There are two ways you can invest in stocks. You can either take long positions if you believe the stock will go up or short positions if you believe they will go down. Keep in mind that shorting stocks is a risky business and you should have enough experience in order to succeed. In addition, you will need a margin account to short stocks.

Bonds: You can buy government bonds or corporate bonds

Rental properties and real estate in general: Rental properties are great investment options for those who can handle the hustle associated with tenants. You can invest in some of the following investment options: Condos rental properties, townhouse rentals, single-family rentals, multifamily rental properties, Airbnb, etc.

Index funds

More details: Where to invest money: An Investment guide

Step 6: Choose a broker if you have to

Before you start investing, you will need an investment account from a broker. You will use this account to buy and sell securities online without having to call anyone.

There are thousands of brokerage firms and they come in all sizes.

Some of the ones you may have heard of include Fidelity Investments, E-Trade, Charles Schwab, and many more.

You will need to do your homework to figure out the broker who meets your needs.

Step 7: Create an investment account

Once you have decided on the type of investment you want to pursue and the broker, you will need to create an investment account. Most investment accounts can be created online.

For example, if you want to invest in stocks, you will need to create a brokerage account. This account will let you buy and sell stocks whenever you want as long as you are following investment terms and conditions provided by your borker. You can also use the same account to invest in other securities other than stocks.

A guide to buying stocks step by step

Stocks and related investment options will be great for those who are interested in growth rather than security. Keep in mind that the risk will be great for these investments due to volatility. Having a diversified account and properly allocated funds will help you minimize your risk.

Do your research and open an account that matches your risk tolerance and investment guidelines.

If you want to put your money into a 401 K, you will create a retirement account through your employer. You can open an IRA if your employer cannot help you with a retirement account. Keep in mind that these accounts are strict and you will pay a big penalty and related charges if you violate their terms of use.

The following article can help you create a brokerage account online.

A guide to creating a brokerage account

All investments do not require an investment account with institutional firms. For example, you will not need a brokerage account if you have decided to invest in rental properties. The only thing you could use is a reports management or a budgeting software such as MS Excel to help you organize your accounts.

Step 8: Education and more education

Depending on the type of investment you have chosen, you will need to educate yourself. For example, if you are going to invest in real estate, you will need to know the real estate investment that will work best for you. Understanding the current market condition and its future trend will help you know how to proceed.

If you have chosen to invest in stocks, you will need to learn as much as you can about stocks and the stock markets. The more you know the better.

Also, the types of learning material you focus on will depend on the kind of investor you want to be. For example, if you want to be a short term stock trader, you will need to focus more on technical analysis instead of fundamental analysis.

This is because the technical analysis will help you analyze stocks’ price movements in the short term by using trading indicators and trading patterns.

There are some investment options that will require less education such as a savings account or CDs. The only homework you will need to do is to figure out the one that works best for you and terms that will not jeopardize your finances.

Step 9: Invest your money

At this point, you will have everything you need to start investing. Buy the security and assets you want to invest your money in.

You can hold your assets for a given time based on your goals and risk tolerance.

Step 10: Manage your risks

Depending on the investment option you have chosen, you may need to put in place risk management strategies.

For example, if you have chosen growth investment methods such as investing in stocks and currencies, you will need to manage your risks very carefully. These investments tend to be more volatile and react to news and economic conditions more than others. It is possible to lose all your money in the market.

For this reason, manage your risks all the time. Using stop-loss orders, trailing stop orders, and limit orders will help you manage your portfolio and reduce risks in the short term.

If an investment you have pursued turned out to be a loser with no green light on the horizon, exit your position to keep your losses small. You can always recover from a small loss.

Step 11: Diversify and allocate your funds properly

The assets you will own in your portfolio will determine your success as an investor. Since the markets do not react the same way under similar economic conditions, it is always important to diversify your funds in different markets. There are some markets that move up due to the crash of others.

Owning assets from different markets will protect your portfolio from a massive loss.

At the same time, allocate your funds in each assets wisely. You should not put all your eggs in the same basket.

How do you know if the value of an asset you own will not go down? It is very difficult to know the exact price movement of an asset or security in the future. For this reason, do not put too much money into one investment.