Simple Steps on How to Invest

by Mike Parker

    You have three basic options for your money. You can spend it, save it or invest it. But your best option might be a combination of all three. Spending money is not a problem for most of us. You have to buy groceries and put gas in the car, not to mention the kids' braces. Putting some money in the rainy day fund at the bank is an easy decision as well. But investing wisely takes a bit more effort on your part. You need a plan, you need to educate yourself on investment products and you need to get started.

    Step 1

    Get your finances in order before you make any investment decisions. Start by determining where you are financially. Create a simple, two-column net worth statement by listing all of your assets in one column and all of your liabilities in the other. Subtract your liabilities from your assets. Whatever is left is your net worth. Create a two-column cash flow statement by listing all of your monthly income in one column and all of your monthly obligations in the other. Subtract your obligations from your income. Whatever is left is your cash flow.

    Step 2

    Use your net worth and cash flow statements to help you develop a financial plan. This plan should include such elements as making a budget, paying down your debt and setting aside money for savings and investing. Take into consideration your investment goals as well as how you handle risk. If the thought of losing money on your retirement account keeps you awake at night, you might have a high aversion to risk. If putting your money into a safe, low-interest certificate of deposit at the bank thrills you as much as watching paint dry, you might have a higher tolerance for risk. Knowing your investment goals and risk tolerance will help you determine the most appropriate investments for your portfolio.

    Step 3

    Do your own research. You don't have to be an expert on every nuance of every investment products, but you should never invest in anything if you don't understand how it works. If you are not confident in your own ability to research a particular investment, you should at least research the brokerage firm or sales agency that you will go through to purchase that investment. When in doubt, check with the Financial Industry Regulatory Authority's BrokerCheck online database of information on investments brokers, dealers, registered representatives and investment advisers.

    Step 4

    Determine the type of investments brokerage firm you wish to use. There are three primary types of brokers; full-service, discount and online firms. Full-service brokers typically offer the greatest level of personal service but also charge the highest fees and commissions. Discount brokers provide more limited service at a discounted rate. Online brokerage firms are the least-expensive route. They will execute your orders, but you are typically on your own for making your investment decisions.

    Step 5

    Open your account and start investing. Before you can enter an order with an investments broker, you'll have to fill out a new account application. You must provide certain personal information, such as your name, address and contact information. You'll also have to provide your taxpayer identification number or Social Security number, and you might be asked for verification of your identity, such as a driver's license or passport. In most cases you'll have to make an initial deposit before you can enter an order to buy a security.

    Step 6

    Stick to your financial plan. The only thing certain about financial markets is that they will change. When they change drastically, you might be tempted to drastically change your investment strategy. While you might need to make periodic adjustments to your financial plan as your age and situation changes, as long as your original plan is sound, you will likely be better off sticking to it than trying to chase the market.

    Tip

    • Invest for the long haul. The time value of money is your greatest ally.

    Warning

    • All investments involve some level of risk, and an investment's past performance is never a guarantee of future results. It is possible to lose money, even on so-called "safe" investments.

    Photo Credits

    • Jupiterimages/BananaStock/Getty Images

    About the Author

    Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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