What do you need to know to start investing?

Dec 06

What do you need to know to start investing?

Have you ever wondered how you could start investing for yourself? You may wonder how to ever get started, how much you may need and where to find the information to make your investing decisions. Maybe it is time to stop worrying and learn to love the stock, share, fund and bond. The basics are easy to grasp, and there is the possibility of a secure financial future ahead, so here is what you need to know start investing.

Are you on a secure footing?

Investing is not for everyone. If you have spiralling debts it makes no sense to invest in stocks, bonds, or mutual funds until these are under control. Any debts you have should be at least in the process of being paid off and attracting only low interest rates.

It is also a sensible precaution to have a ‘fall back’ fund of about six months of basic living expenses to cover you for unforeseen events such as job loss or a serious accident. Finally, it is advisable, but not essential, to be regularly contributing to a pension either privately or through your employer.

How much will you need?

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Surprisingly little is the answer. It is not hard to find stock mutual funds asking for an initial outlay of around £300 which is not a big ask. Many of these will even allow you to by-pass the initial investment in favour of a commitment to smaller, regular payments by direct debit.

How should you invest?

Your choice of investment is determined by your financial goals, namely what you need the money for and when you need it. The sorts of investments that are suitable for you largely depend on the amount of time you have before you need the money. Stocks are long-term investments, and you should plan on holding them for five years or longer to realise their potential.

How much risk should you take?

If you are cautious with money then investing in volatile technology stocks or emerging markets is probably not for you. Without needing to employ quantitative risk management strategies to reduce your risk, you should first aim to match your investments to your risk tolerance. There are several useful tools that can help you to understand your attitude to risk.

How can you choose investments?

Risk experts like SunGard APT (http://www.sungard.com/APT) will strongly advise you to diversify your investments to reduce the risk to your overall portfolio. Typically one type of investment does well whilst another may suffer. The classic example of this is that when returns on stocks are high, returns on bonds tend to be low. If you have investments in both types of funds, your combined return will ride the storm of a downturn in one or the other.

If you are starting out with investing, a stock mutual fund is a better bet than buying stocks in individual companies. A carefully chosen stock mutual fund represents less risk because it is not relying on the fortune of just one company but provides returns based on the performance of many companies from different sectors.

Where can you find out more?

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Before you invest, start talking to those friends who already do so, keep your eye on sites like fool.co.uk, moneyweek.com and the financial pages of newspapers. Know your goals, understand your risk tolerance and enjoy getting to know those markets.