Necessity of investing.
There are three major reasons why everyone young or old; rich or poor; should work at building a nest egg.
1. Preparing for retirement.
This should be the most obvious, no one wants to work for someone else until the day they die. Nothing in life is guaranteed, the chances of our generation having that full pension and social security by the time we are 65 is looking slimmer and slimmer each passing year. Plan for the worst and start putting some cash away so that when we get to retirement age we are able to do so.
2. Wealth Accumulation.
The more you got, the lesser the impact of some of life's unpleasant misfortunes. Sure money doesn't make you happy, but it does make things easier.
3. Multiple Income Sources
Sure you work for a living, but what if you lose your job or your employer goes under. Focus on working to be able to live off your own rather than having to depend on the viability and success of someone else. Having multiple streams of income lessens your dependency on any one company or person or market.
Getting Started
Investing in the markets may seem like a daunting ordeal, but it's not nearly as hard as you may think to get started.
1. Saving Up
This is perhaps the most difficult step for many people to begin investing, as this usually requires some kind of lifestyle change, as many people like to spend their the majority of their income in one way or another. Be it having a fancy car, a huge house, buying each new video game, book, etc… people either load themselves down with bills or purchases that they don't need rather than to put money away for future gains. Is it cool driving a 40,000$ car? Sure, but if instead you purchased a 20,000$ used vehicle and put the other 20k into the market, in 30 years time that 20k would turn into 201,000$ and earning you 16,000$ a year.
Set out a plan, and try to make it at least a little bit aggressive; such as say 100$ or 200$ a week. This of course is going to be different for everyone so use your own judgment.
Most brokers require an initial 2,000$ to open your account. Most financial advisors advise saving up 10,000$ prior to opening an account so that you can properly diversify yourself. Personally if you can save up the 2k I'd open up the account then and deposit the money. Once you have your money in your brokerage account it's much more likely that it would stay there and not be spent like if it was in your savings or checking account.
2. Types of investments and available markets.
There are an incredible amount of markets where one could put ones money in the hopes of making more money. Anything from stocks to baseball cards are considered investments to many, but we are going to concentrate on the formal markets starting with the stock/equity market, but also branching into Options, Bonds, Real Estate, Currency/FOREX, Futures, CD's, Mutual Funds, ETF's, CDO's, commodities, repo, Hedge funds, and others.
3. Investment VS Speculation
There is a small but important distinct difference between the two. Speculation is a gamble where as an investment is well thought out with the priority of minimizing risk. If I buy a lotto ticket, I'm speculating that my numbers will be picked. If I buy a piece of commercial property with renters lined up and a complete business plan; I'm making an investment.
For the majority of my talks and write ups I'll be focusing on Investments. But there is some room for speculation in the markets but we'll talk about that much further along.
4. Looking for a broker
There's several things to look for in a broker, especially when you're new to the markets.
Full Service - These brokers tend to have a higher commission per trade, but are available to be contacted by phone or in person and will make trades according to your preferences and wishes. They also may have research people working for them and a heads up in the market. Though they well often push stocks that their own firms have a stake in, so be careful that your broker is working for you and not himself.
Discount Broker - These brokers are a bit cheaper to deal with but expect you to the research on your own.
Online Broker - Relatively new to the scene is the online firms, these brokers are some of the cheapest commissions, provide a number of research databases, charts, and graphs. But otherwise you're totally on your own.
I personally stick to online brokers, but they still aren't all the same. Make sure to check out a variety and compare commission rates, markets available to trade in, margin rates(interest rates on margin), account types, and access to information such as quotes, reports, and charts.
One of my personal brokers is OptionsExpress that has a commission of 9.99$, with a 6.5% margin rate, interactive quotes, charts, SEC info, and access to Standard and Poor reports. The brokerage also deals in bond, options, and future markets as well as stocks; making this an excellent broker for a variety of trading options. If anyone in their own research decides that they would like to use this broker, by all means get a hold of me prior to signing up and we can work out a referral deal that adds 100$ to each person's account.
5. Your First Trades
As you build your portfolio the first stocks should be restricted to well known, healthy companies that pay a respectable dividend. In future write ups I'll go through steps you can take to analyze the health of a company by studying its financials, quarterly reports, press conferences, insider trading, and other available data.
