To invest is to allocate money (or sometimes another resource, such as time) in the expectation of some benefit in the future.
In finance, the expected future benefit from investment is called a return (to investment). The return may consist of capital gain and / or investment income, including dividends, interest, rental income etc. The economic return to an investment is the appropriately discounted value of the future returns to the investment.
Investment generally results in acquiring an asset, also called an investment. If the asset is available at a price worth investing, it is normally expected either to generate income, or to appreciate in value, so that it can be sold at a higher price (or both).
Following points should keep in mind before investing money in the market: –
• Ensure investing is right for you- Investing in the stock market involves risk, and this includes the risk of permanently losing money. Before investing, always ensure you have your basic financial needs taken care of in the event of a job loss or catastrophic event.
• Make sure you have 3 to 6 months of your income readily available in a savings account. This ensures that if you quickly need money, you will not need to rely on selling your stocks. Even relatively "safe" stocks can fluctuate dramatically over time, and there is always a probability your stock could be below what you bought it for when you need cash.
• Choose the appropriate type of account. Depending on your investment needs, there are several different types of accounts you may want to consider opening. Each of these accounts represents a vehicle in which to hold your investments.
• Implement dollar cost averaging. While this may sound complex, dollar cost averaging simply refers to the fact that – by investing the same amount each month – your average purchase price will reflect the average share price over time. Dollar cost averaging reduces risk due to the fact that by investing small sums on regular intervals, you reduce your odds of accidentally investing before a large downturn.
• Explore compounding. Compounding is an essential concept in investing, and refers to a stock (or any asset) generating earnings based on its reinvested earnings.
• Avoid concentration in a few stocks. The concept of not having all your eggs in one basket is key in investing. To start, your focus should be on getting broad diversification, or having your money spread out over many different stocks.
• Explore investment options. There are many different types of investment options. However, since this article focuses on the stock market, there are three primary ways to gain stock market exposure.
• Find a broker or mutual fund company that meets your needs. Utilize a brokerage or mutual fund firm that will make investments on your behalf. You will want to focus on both cost and value of the services the broker will provide you.
• Open an account. You fill out a form containing personal information that will be used in placing your orders and paying your taxes. In addition, you will transfer the money into the account you will use to make your first investments.
• Be patient. The number-one obstacle that prevents investors from seeing the huge effects of compounding mentioned earlier is lack of patience. Indeed, it is difficult to watch a small balance grow slowly and, in some instances, lose money in the short term.
• Keep up the pace. Concentrate on the pace of your contributions. Stick to the amount and frequency you decided upon earlier, and let your investment build up slowly.
• Stay informed and look ahead. In this day and age, with technology that can provide you with the information you seek in an instant, it is tough to look several years to the future while monitoring your investment balances.
• Stay the course. The second biggest obstacle to achieving compounding is the temptation to change your strategy by chasing fast returns from investments with recent big gains or selling investments with recent losses. That's actually the opposite of what most really successful investors do.