Investing 101

Here’s a simple fact: if you want to create wealth you have to invest your money.  The part that may not be so simple:  learning how to invest.  Cotton Candy knows that after you’ve worked for your money, you want to make your money work for you.  And with time, effort and education the act of investing can likely garner you numerous rewards that translate into robust retirement, education and recreation funds.  Cotton Candy contributor and stock market analyst Erin Swenlin-Heim spells out ten essentials for the novice investor who’s ready to dive in.

No. 1 You need to invest.
This may seem obvious, but many potential investors shy away from the stock market and other more risky opportunities.  Investing isn’t just for high-income wage earners.  It is important to have not only a checking or cash account but also a permanent savings and investment account, regardless of your age or income level.

No. 2 Determine how much to invest.
A little goes a long way.  Your initial investment doesn’t need to be thousands of dollars.  Start small, but above all start.  You should be investing about ten percent or more of your income after you have saved about three to six months of your current salary for rainy days.

No. 3 Shop around.
Before you open an investment account, find the company that will offer you the most flexibility and most importantly low commissions and fees for your trades.

No. 4 Contribute regularly to your investments.
Set up an automatic deduction that puts a set amount of every paycheck into your investment account.  Many employers offer programs that will do this, and sometimes they will match the dollar amount you invest.

No. 5 Do a risk assessment.
Most financial experts will tell you that the younger you are the more risks you can take.  It is true a young investor can tolerate more loss, but can you?  Understand your own personal tolerance and economic situation.

No. 6 Research.
Always know what you are getting into before you put your hard-earned money into it.  Technical analysis is helpful because this type of breakdown doesn’t include the psychology of the investment; it relies on the numbers.  Consider taking a technical analysis short course that will help you learn the basics.

No. 7 Know the market trends.
Know what’s the general trend of the market and the stock or fund you are interested in investing your money.  If in general it is a ‘bear’ or down market, your chance of finding a stock that will go up is significantly lower.  The stock itself can be in a bear market – a market condition in which the prices of securities are falling – or bull market – a financial market of a group of securities in which prices are rising.  Don’t bet against the trend.

No. 8 Set stops.
A stop is the lowest price or percentage you are willing to let a stock or fund go to before you sell it.  With all investments you need to know what percent loss you can tolerate.  Once it is set, you can walk away from the computer knowing that if the stop triggers, it will automatically be sold.

No. 9 Set limits.
A limit is the opposite of a stop and generally is used for shorter-term investments.  Go in knowing what percentage you want or think you can make based on your research and set the limit at that gain.  As with a stop, you can walk away knowing that when that limit is reached it will automatically be sold for you at that profit.

No. 10 Take charge.
Even if you have your company or investment broker manage your account, stay in control.  You care about your money more than any fund or money manager.

Written By: Erin Swenlin-Heim

Erin is a stock market analyst and blogger with DecisionPoint.com.  She has a Bachelor’s degree in mathematics from the University of Southern California and an M.S. in Information Resource Management from the Air Force Institute of Technology.