HOW TO BECOME AN INVESTOR: Steps To Become An Investor in 2022

HOW TO BECOME AN INVESTOR: Steps To Become An Investor in 2022
HOW TO BECOME AN INVESTOR: Steps To Become An Investor in 2022

To successfully become an investor is a journey, not a one-time event, and you need to prepare as if you were going on a long journey.  Start by defining your destination and then plan your investment journey accordingly. 

For example, do you plan to retire in 20 years at age 55?  How much money will you need for this?  You should ask these questions first.  The plan you come up with will depend on your investment goals.

How To Become An Investor In 2022

Read books or take an investment course that deals with modern financial ideas.  The people who came up with theories like portfolio optimization, diversification, and market efficiency won their Nobel Prizes for a reason. 

Investing is a combination of science (financial fundamentals) and art (qualitative factors).  The scientific aspect of finance is a solid start and should not be ignored.  If science isn’t your forte, don’t worry. 

There are many texts, such as Jeremy Siegel’s Stocks for the Long Term that explain high-level financial ideas in an easy-to-understand way. Once you know what works in the market, you can come up with simple rules that will work for you. 

For example, Warren Buffett is one of the most successful investors.  His simple investment style is summed up in this well-known quote: “Never invest in a business you cannot understand.”  It served him well.  While it missed the tech boom, it avoided the subsequent devastating bust of the 2000 tech bubble.

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Understanding Your Investment Options

Whether you invest through a 401(k) or similar employer-sponsored retirement plan, a traditional or Roth IRA, or a standard investment account, you choose what to invest in.

It is important to understand each tool and understand the risk it carries.  The most popular investments for those just starting out include:

Stocks

A stock is a share of ownership in one company.  Shares are also known as stocks. Shares are purchased at a share price that can range from single digits to several thousand dollars, depending on the company. 

Bonds

A bond is essentially a loan to a company or government agency that agrees to pay you back after a certain number of years.  Meanwhile, you earn interest.

Bonds are usually less risky than stocks because you know exactly when you will get your money back and how much you will earn.  But bonds offer lower long-term returns, so they should only be a small part of a long-term investment portfolio.

Mutual investment funds

A mutual fund is a collection of investments pooled together.  Mutual funds allow investors to skip the work of selecting individual stocks and bonds and instead buy a diverse collection in one transaction.  The internal diversification of mutual funds makes them generally less risky than individual stocks.

Some mutual funds are managed by a professional, but index funds—a type of mutual fund—tracks the performance of a specific stock market index, such as the S&P 500. By eliminating professional management, index funds can charge lower fees than actively managed mutual funds.

Most 401(k)s offer a thoughtful selection of mutual or index funds with no minimum investment, but outside of these plans, these funds may require a minimum of $1,000 or more.

Exchange-traded funds

Like a mutual fund, an ETF holds many individual investments bundled together.  The difference is that ETFs trade intraday like stocks and are bought at the price of the stock.

ETF shares are often priced below the mutual fund’s minimum investment requirements, making ETFs a good choice for new investors or smaller budgets.

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How To Become An Investor With No Money

To invest, you first need to save a little.  It takes a lot less time than you think and you can do it in very small steps.  If you’ve never saved, you can start by putting away just $10 a week.  That may not seem like much, but it adds up to over $500 over the course of a year.

Try putting $10 in an envelope, a shoebox, a small safe, or even that legendary bank of first resort, the cookie jar.  Although this may seem silly, it is often a necessary first step.  Get into the habit of living on a little less than you earn, and stash your savings in a safe place.

The electronic equivalent of a cookie jar is an online savings account;  this is separate from your checking account.  The money can be withdrawn within two business days if you need it, but it is not tied to your debit card.  Then, when the stash is big enough, you can take it out and move it into some real investment vehicles.

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How To Become An Investor In Stock Market

There are several ways to approach investing in stocks.  Choose the option below that best reflects how you want to invest and how practical you would like to be in choosing the stocks you invest in.

Select an investment account

Once you’ve decided on your preferences, you’re ready to buy an investment account.  For practical types, this usually means a brokerage account.  For those who need a little help, opening an account through a robo-advisor is a smart option.  We will discuss both processes below.

Learn how to invest in stocks versus funds

For most people, investing in the stock market means choosing between these two types of investments:

Stock mutual funds or exchange funds.  Mutual funds allow you to buy small parts of many different stocks in one transaction.  Index funds and ETFs are a type of mutual fund that tracks an index; for example, the Standard & Poor’s 500 fund replicates this index by buying shares of the companies included in it. 

When you invest in a fund, you also own small shares of each of these companies.  You can combine several funds to create a diversified portfolio.  Note that equity mutual funds are also sometimes called equity mutual funds.

If you’re after a particular company, you can buy a single stock or multiple stocks to dip your toe into the stock trading waters.  Building a diversified portfolio of many individual stocks is possible, but requires significant investment and research. 

If you go this route, remember that individual stocks will have ups and downs.  If you’re researching a company and deciding to invest in it, think about why you chose that particular company if you start feeling anxious on a bad day.

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How To Become An Investor In Real Estate

Buy and hold

In markets where property values ​​are high, investing for future appreciation and building equity over the long term can be a successful investment strategy.

Of course, positive cash flow is still important.  But by smartly buying and holding for the long term, investors can reap the rewards of potential windfalls years or even decades down the road.

Fix-and-flip

Negotiating off-market deals with motivated sellers is another key way to profit from your real estate investment.  However, in many cases, the motivation of the sellers is that they do not have the money to repair and upgrade.

  Fix-and-flip investors need to buy cheap, accurately estimate repair costs, and then sell the property for more than they invested in to make a profit.  This is often much easier said than done.

Wholesale trade

Wholesale real estate investment is an arbitrage opportunity for an investor to make a quick and healthy profit.

Real estate wholesalers don’t make money on home foreclosures.  Instead, they find highly motivated sellers in a pinch, accurately estimate the cost of repairs and the fair market value of the home, and then pass the contract on to another investor in exchange for a fixed income.

Crowdfunding and REITs

Investors looking for opportunities that are almost 100% passive often choose crowdfunding or buying REIT (real estate investment trust) shares.

Real estate crowdfunding raises small amounts of money from a large number of investors to buy and manage large and complex income-producing properties.  Shares of public REITs can be found on major stock exchanges.  Investors receive a small pro rata share of the quarterly cash flow and profit when the property is sold.

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Conclusion

The first and most important step in becoming an investor is to put into words the reason you want to move your cash, which is sitting safely in the bank, into a higher growth vehicle where it may be at risk.  In other words, you will increase your chances of success if you first understand why you are investing and recognize that your capital can go down as well as up in value depending on how much risk you take.

Are you investing for retirement?  Or perhaps your child’s university education?  Knowing, clearly articulating, and writing down a single overall investment objective will help you refine the types of stocks, bonds, exchange-traded funds (ETFs) and other financial instruments you’ll buy as you build your full investment portfolio over time.

How To Become An Investor FAQs

How Do Investors Make Money?

Investors can make money in several ways.  Some buy commercial products, property or financial commodities (such as stocks and bonds) and sell them at a higher price.  Real estate investors buy real estate, improve the property, and then sell it for a profit.  Investors who work for clients or for a financial firm may be paid a salary and may receive bonuses or commissions based on a percentage of the profits they have made for their clients.

What Does An Investor Do?

Many investors have certain skills to carry out their duties.  After reviewing resumes, we were able to narrow down the list of the most common skills for a person in this position.  We found that many resumes emphasize interpersonal, speaking, and writing skills.

Can You Invest For Retirement If You Don't Have A 401(K)?

If you don’t have a 401(k), you can invest for retirement in an individual retirement account like a traditional or Roth IRA.

If you’re investing for another purpose, you’ll probably want to avoid retirement accounts — which are designed to be used for retirement and therefore have limits on when and how you can withdraw your money — and opt for a taxable brokerage account instead.  You can withdraw money from a taxable brokerage account at any time.

If you're investing for another purpose, you'll probably want to avoid retirement accounts — which are designed to be used for retirement and therefore have limits on when and how you can withdraw your money — and opt for a taxable brokerage account instead.  You can withdraw money from a taxable brokerage account at any time.

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