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Investment 101 For Newbies: Investing For Beginners

Investment 101 For Newbies: Investing For Beginners
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So you got a great stream of income, got a new salary raised and looking for a great way to put your funds into a great investment. you are a beginner and investing although great looks scary to you because you don’t want to lose money in shady deals (let’s be honest -who want to make a loss? best you guess is any one answering that you will most definitely reply with a big “NO”

As a beginner, there are a million ideas that run through your mind when you see people on Forbes hitting millions from their valued assets (investment). Before you proceed, you should note that all investment is generally classified as:

  • Good investment
  • Bad investment

 

  1. Good investment involves putting funds into great income-streams. An example of a rich tycoon who does this is Robert Kiyosaki, author of Rich Dad Poor Dad. In a simple chart low, a great business module should go like this:

Investment for beginners

Good investment is investment whose income is greater than its expenses, can survive in the long run while self-sustaining itself.

  1. Bad investment: This type of investment are usually short-term and promises huge profit within a short period of time when compared to the capital required. Most people tend to go for this type of investment as it promises heaven on earth but the end is usually disastrous causing investors to lose their capital. An example of a bad investment.

Nobody starts out as a professional investor, and even the best investors in the world were once in your shoes.

You might be wondering:

  • Where should I begin?
  • How do I begin?

These two questions are seemingly daunting to newbies especially if you’ve encountered the huge collection of investing terms that look like the bogie man-like alternative Minimum Tax (AMT), Annualized rate of return and asset allocation and market capitalization.

Now:

Getting started and acquainting yourself to the investment world isn’t as scary as it might seem. In fact it can become pretty easy with good practice.

Investing As A Beginner: A Full Guide

The first step to wise investing is perceive and decide the type of asset you want to own: But here’s the kicker, investing is about spending money, time or energy with the expectation of getting more of any resources back in the future- a few factors like inflation, time, risk, annual growth rate etc. go a long way in making sure you get the best or worst from your investment.

This is best accomplished through the acquisition of productive assets. Productive assets are investments that are capable of producing something, especially in abundance from some sort of activity. For example, if you buy a painting( cheap or expensive), it is not a productive asset because 50 years from now, you will still only own a painting which may or may not worth more or less money. You may however be able to convert it into a quan-productive asset (similar to productive asset) by opening a museum and charging a fee of entry to see it. On the other hand, if you purchase an apartment building, you will not only have the building, but all of the cash it produces from rent and service income over time. If the building were to be destroyed, you’d still have the cash flow from years of operation- which you could use to support your lifestyle, giving to those in need, or reinvested in other business opportunities.

Keep in mind that each type of productive asset has its own advantage and disadvantage, unique unusual traits, tax rules, legal system and other relevant features. In a wide sense, productive assets can be divided into stocks, bonds and real estate.

Investing in Stocks

Investing in stocks simply means business ownership or business equity. You are entitled to a share of the profit or lossless by a company’s operational activity when you own equity in that business. Over time, equities have proven to be the most rewarding investment for investors seeking to build wealth over time without using huge amounts of leverage.

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It gets better:

Business equity investments can come in one of two forms; publicly traded and privately held.

Investing in Publicly Traded Business: Initial public offering (IPO) allows private business sometimes to sell part of themselves to outside investors. When this happens, anyone can buy shares and become an equity owner.

The type of publicly traded stock you own may differ based on timing and market value. For example, if you are the type of person that likes companies that are stable and provide a frequent cash flow for owners, you are most probably going to be drawn to blue-chip stocks, and may even have an affinity for dividend investing, value investing and dividend growth investing.

Investing in Privately Held Business: Privately held businesses are businesses that have no public market for their shares. In other words, they do not sell shares publicly and as a result of this, only a few people get to own these shares.

Want to know the best part?

They can be a high-risk proposal which can be highly rewarding for the entrepreneur when started from scratch. It’s fairly simple and requires:

  • You think of an idea(idea creation)
  • You pull resources together to run the business while making sure that your expenses are less when compared with your revenue.
  • Over time, you let it grow to it’s fullest potential.
  • Make sure that you are being well compensated for your time and capital that you invest in it. A good return is experienced when you can earn from the investment passively.

What’s the bottom line?

Running or owning a business is not easy but owning a good business can and will most certainly put food on your table, pay for your vacations, send your children to college and the university and most importantly, allow you to retire in comfort.

Investing in Bonds (Fixed-income securities)

When you purchase bonds; you are lending money to the bond issuer in exchange for interest income. There are about 10 thousand ways this can be done, ranging from money markets and buying certificates of deposit to U.S savings bonds to investing in tax-free municipal bonds and corporate bonds investment.

Just like stocks, many fixed-income securities require you make purchase through a brokerage account. To choose your broker, you will need to select between either a discount or full-service model.             When operating a new brokerage account, the, minimum investment can vary, usually ranging from $400, $500 to $1,000; usually lower for education or IRAs accounts. An alternative approach would be to work with a registered investment advisor or asset management company that operates on a fiduciary basis.

Real Estate Investment

The business of buying, renting and selling buildings or lands is pretty much as old as mankind itself. There are several ways to make money from real estate investment but it generally boils down to either

  1. Developing a land or building( or both) and selling it for profit
  2. Owning a building or land and letting others in exchange for rent or lease payments.

For a lot of investors, investing in real estate has been a path way to wealth because it capitalizes on the use of leverage. This can be bad if the investments goes haywire, turning out to be a poor one, but, when applied to the right investment, at the right time, on the right terms, it gives norm to someone without a lot of net worth to rapidly accumulate resources, controlling a larger asset base than he or she could otherwise afford.

This is crazy:

Like stock, real estate can also be traded. I know this sounds confusing and crazy but Hey! It does happen. This is usually done through a corporation that possesses the qualities of a real estate investment trust, or REIT. For example, you can invest in office building REITs and collect your share of the revenue from organizations that use the office space regularly or occasionally. There are numerous distinct varieties of REITs, hotel REITs, storage unit REITs, apartment complex REITs, REITs that specializes in office building, parking garage REITs and even senior housing.

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The Second investing step is deciding where you want to hold those assets: Let’s do a little recap; we’ve looked at the type of investment and its general categories.

After you’ve learned about the type of investment, general categories of investing and ways by which they can be acquired, the next big thing is: where those investment will be held. This decision if made positively or negatively will influence hugely how your investments are taxed; therefore it’s not a decision to be lightly. Your choices include but not limited to taxable brokerage accounts, Roth IRAS, SEP IRA, family limited partnerships and traditional IRAS. Good tax planning especially in your career can mean a lot of extra wealth down the road as the benefit pile up.

Let’s dive briefly into some of broad categories

  • Taxable account: If you decide to go for type of account, you will pay taxes along way, but your money is not nearly as restricted. An example of taxable account is a brokerage account. You can spend your cash anytime and in ways you want to. You can cash it all out and buy a house. You are allowed to add as much fund as you desire to it each year, without restrictions. It is supreme in flexibility but you have to give the American government his cut.
  • Tax shelters: Retirement plans offer different benefits. Example of this plans 401(k) or Roth IRAS. Some are tax differed, this means you get a tax deduction at the time you deposit initial capital into the account, and then pay taxes into the future, giving you tax-deferred growth year after year others are tax-free, meaning you don’t get a tax deduction (they are usually funded with after-tax dollars).

Want to know the best part you’ll never pay on the investment profit generated within the account nor on the money once you withdraw in later in your life

Some retirement account and also provided or contain asset protection benefits. For example some have unlimited bankruptcy protection, meaning if you suffer a disaster or an event that wipe of completely your personal balance sheet and forces you to declare bankruptcy, your retirement savings will be out of reach to creditors. Others have limitation on the asset protection afforded to them, but still reach into the seven-figures.

Trust or other Asset protection Mechanism: Additionally, you can hold your investment through structure or entitles such as trust funds. There are various planning and asset protection benefits of using these special ownership methods, especially if you want to limit how your capital is used in a particular way. And if you have a lot of operating assets or real estate investments, i advice you to speak your attorney about setting up a holding company.

An Example of how a new investor might start investing

Now that the basic concept has been well discussed, let’s look at how a new investor might actually start investing.

Firstly, assuming you work for someone the best option would be probably sign up for a 401(k), 403(b), or other employer-sponsored retirement as quickly as possible. Majority of employees offers a 100 percent match on the first 3 percent of salary, and you earn $100,000 per year, that means on the first $3,000 you have withheld from your pay check and kept in your retirement account, your boss will deposit into your retirement account an additional $3,000 in tax-free money.

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You will need to invest the money you put in the account whether your employer offers or does not offer you matching. It is very possible that your 401(K) will probably have a default option, but choose the mutual funds or investment vehicles that fit into the needs of your future. As money gets automatically accumulated in your account with each pay check, it will be put toward that investment.

Secondly, let’s assume you fall under the income limit eligibility requirements, you’ll probably want to fund a Roth IRA up to the minimum contribution limits allowed. That is $5,500 for an individual who is younger than 50 years old, and $6,500 for male or female who is older than 50 years old. You can each fund your own Roth IRA if you are married- be sure to invest the money ($5,500 base contribution + $1,000 catch-up contribution) you save in there- Normally, IRA providers will park your money in a safe, low-return device like a money market fund until you decide on what you want to use it for- you may want to put your money toward mutual fund, ETFs or other investments.

With that out of the way, you’d want to return to your 401(K) and fund the remainder (exceeding the matching limit you already funded) to whatever overall limitation you are allowed to take advantage of that year. Once you’ve taken care of this, you might begin to add taxable investments to your brokerage accounts, perhaps participate in direct stock purchase plans, acquire real estate, and fund other investment opportunities.

The next investing step is to decide how you want to own these assets

Once you’ve settled on the type of asset you want to own, the next step is to decide how you are going to own it. To better understand this step, let’s look at business equity. You can either decide

  1. You want a stake in a publicly traded business
  2. Own the shares out rightly or completely
  3. Through a pooled structure
Outright Ownership Pooled ownership
If you opt in for this type of ownership, you are going to be purchasing shares of individual companies directly. To minimize risk, this requires a certain level of knowledge. A huge amount of normal investors do not invest in stocks directly but, instead, do it through a pooled mechanism, such as a mutual fund or an exchange traded fund(ETF). You mix your money with other people and buy ownership in a number of companies through a shared entity/structure.
In simple terms, this means focusing on the price you are paying relative to the risk-adjusted cash flows the asset is generating. These pooled tools can take up many forms. Some wealthy investors invest in hedge funds, but most individual investors will opt for devices like exchange-traded funds and index funds, which makes it possible to buy diverse portfolios at a much cheaper rate you can afford on your own.
Learn how to calculate enterprise value, operating profit margin, and the gross profit margin, and compare them to other business in the same sector or industry. Read the balance sheet and the income statement. Look at the asset management company; which holds larger stakes to figure out the types of co-owners with which you are dealing.  
   
   

 

Bottom line

Investments managed efficiently could very well increase your odds of retiring comfortably drastically. Investing for beginners is not gambling-in fact it takes time.

Comments (14)

  • Hello ,

    I saw your tweets and thought I will check your website. Have to say it looks very good!
    I’m also interested in this topic and have recently started my journey as young entrepreneur.

    I’m also looking for the ways on how to promote my website. I have tried AdSense and Facebok Ads, however it is getting very expensive. Was thinking about starting using analytics. Do you recommend it?
    Can you recommend something what works best for you?

    I also want to improve SEO of my website. Would appreciate, if you can have a quick look at my website and give me an advice what I should improve: http://janzac.com/
    (Recently I have added a new page about FutureNet and the way how users can make money on this social networking portal.)

    I have subscribed to your newsletter. 🙂

    Hope to hear from you soon.

    P.S.
    Maybe I will add link to your website on my website and you will add link to my website on your website? It will improve SEO of our websites, right? What do you think?

    Regards
    Jan Zac

    Reply
    • Hello Janz, thanks for stopping by. Glad to know you are on a journey to become self-employed, did you quit your day job? or you just picked entrepreneurship as a side hustle?. Personally, I rely more on organic traffic and use of related forums for my traffic as adwords can be expensive. I would recommend you try “bing ads”- i used them one time and the results was A-M-A-Z-I-N-G. Your website looks beautiful and loads up pretty fast with great UI;maybe work on organic traffic and backlink building a bit more. If you are interested in a link exchange, you can reach me on: bowomide@yahoo.com. Thanks for subscribing; i will reciprocate *Cheers*

      Reply
  • Very helpful. Do you also have any advice on how to build an online business? It seems like online is the nw drug these days. Thanks

    Reply
  • This is exactly what I was looking for. 10 Years in International NGO(Africa) , I am now ready to move on and start something in this sector.This guide came to me as I was Looking for a Sub role in Capacity Building i.e. Financial Management, Start Up, Close Out, Strategy Management, Accounting for International NGOs etc on the internet. Thanks a lot

    Reply
  • Whether you’re saving to get wealthy as a teenager,for retirement or seeking wealth through the use of magic compound growth, the “big secret” is really just a simple three-step plan:

    Earn a decent living and live beneath your means
    Invest that difference automatically, and increase the investment with each raise
    Invest in a way that takes advantage of your tax situation and choose ultra-low-cost (0.20% per year or less), passively managed, widely diversified (across stocks and bonds and across domestic and international) index funds that are appropriately balanced for your age.

    The first thing you need to realize is that you do not need to find a way to spend every last green you earn. 🙂 No matter what you earn or where you live, there is someone living near you who earns less and still leads a happy life. Learn to Live like that person. The rest of this answer will give you ideas about how to take advantage of the difference between what you make and what you spend so that you can invest for retirement, where you can reach the point where you can do whatever work you do because you *want* to, not because you *have* to. That kind of freedom is a very nice feeling!

    In America, you’ll want to use legal ways to avoid taxes where you can. Your employer probably has a web site describing your options: a 401(k) plan — especially if it includes a match from your employer, where they contribute if you do — is usually at the top of the list. Other things include a 403(b) (if you’re at a non-profit), 457 (if you work for some states), and 529 (if you want to save for your children’s future expenses). You can also fund your own Traditional IRA if you want, directly through a brokerage like Vanguard or Fidelity. You can’t do *all* of them, though; the IRS determines which combinations you can do.

    All of these are tax-deferred, meaning that the money you invest won’t be taxed now (and that lowers your tax at your marginal rate, which is probably at least 25% plus whatever your state income tax is). It puts the money away until you’re 59.5 or thereabouts and then you finally pay income tax when you take it out (but if you’ve stopped working by then, it’ll almost certainly be at a lower rate because it’ll be your total tax rate, not just the higher marginal rate).

    There are limits to how much money you can put into these, though, and if you’re disciplined about investing, you’re probably going to hit them. 🙂 That’s okay, you have more options: the Roth IRA is like a 401(k), but you pay taxes now, but never have to pay taxes on any of the profits, ever. You’d set one up through Vanguard or Fidelity, there’s a $5,500-per-year limit on that. It has one other nice feature — after five years, you can take your contributions out in an emergency if you have to, without any penalty, as long as you leave the profits you’ve made in there (and then you can put the money back in if you want).

    If you exceed all of those limits for contributions, you can keep going in other ways — it won’t have the tax savings that the other money does, but it’s still going to grow in a compound, exponential way. Vanguard or Fidelity are good spots to do that.

    Which funds should you pick? My advice is super-low-cost, passively-managed, widely-diversified index funds.

    Super-low-cost means that the OER (Operating Expense Ratio) charged by the brokerage is no more than 20 cents, per $100 invested, per year — or 0.20%.

    Passively-managed means that there isn’t a human or team of humans who run the fund trying to “beat the market”. The problem with that is they (a) need to be paid, by you and the other investors, and (b) they beat the market, on average, about 40% of the time. A chimp could do better and gets paid in bananas.

    Widely-diversified means the fund includes lots and lots of stocks and/or bonds so that you’re not exposed to one particular company. You don’t want to be that guy who puts his entire retirement fund in Enron stock, then loses the whole thing. There’s no need for you to gamble; you’re going to pile up a *lot* of money playing it safe.

    Index funds try to match well-known stock indexes like the S&P 500 or the MSCI International index. The managers of these funds don’t try to pick the best stocks; they just try to match these publicly-known indexes as closely as they can. For the most part, they’re just buying shares in the appropriate amounts; that’s why they can charge so little to their investors.

    If you don’t want to pick and choose index funds yourself, there’s good news — you can just take your birth-year and add 60 then go to vanguard(dot)com and invest in the Vanguard Target Retirement fund that’s closest to the year you calculated (you’ll want your fund to be with Vanguard in that event). That fund invests in stock index funds and bond index funds, both US and International, in such a way that will be aggressive when you’re young and more conservative as you age, which is exactly what you want to do with a long-term investment — and it’ll happen automatically, without you having to keep track of it.

    Some of these investment types, like the 401(k), might be required to be with your employer’s broker of choice and you might have a limited number of options for investment funds. That’s okay, there’s almost always a few funds that are pretty low-cost, passively-managed, diversified index funds. If you want, you can look at the ratios of stock vs. bond, US vs International funds in the Vanguard Target Retirement fund you want and replicate those ratios as closely as you can in your own investments outside of Vanguard. It’ll take a little work on your part to keep up with the changing Target fund, but you can actually save a little bit of the OER expense (and you’re going to soon have a LOT of money, so it’ll be worth it to do so).

    Finally, do it automatically. Figure out where you want your money to go and how you want it invested, then have the money taken out of your paycheck before you ever see it. When you get raises and promotions that bump your salary, bump up your investments, too. This is a strategy that will put you on the path to being a multi-millionaire without much chance of failure, to be honest — if you’re 25 years old now, you’d likely be ticking off your third million before you’re 50. There are no guarantees in the world, of course, but based on the history of the world economy, you’d be as likely to do *better* as to do worse.

    All the best!

    Reply
  • In my opinion, investing starts from an idea; a basic concept conceived in the mind which is then channeled by positive attitude and great resources. Without these, investment cannot be made

    Reply
  • You are very right. 15 difference in international prices (BTC to USD) and in Indian market (BTC to INR) is a big difference. However this has happened due to demonetization. Due to demonetization, there has been drastic increase in demand. The Bitcoin exchanges do not have enough liquidity. When they have limited number of bitcoins with them and demand is huge, they have no option but to increase the price. No one is selling bitcoins so these exchanges are not receiving any SELL orders. They are only getting BUY orders resulting in a crunch leading to increase in their selling price.

    Reply

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