How to Start With Investing
Before you are ready to invest, make sure you have ample money put away to cover any emergency situation that could arise. A rule of thumb is to have, at minimum, 3 months’ worth of expenses put away as an emergency fund. Once you have reached this stage then you want to use a sum of money to invest, that you can handle losing. You don’t to want to be dependent and emotionally tied to the investment that you are making. If you are, then the sum of money is too large, start smaller.
Initially, focus on something that you enjoy and are familiar with. For example, if you love cars then look at the stocks of some car companies. Read about the actual company and see what the company intends to do in the future and what it has done in the recent past. The company’s website would be an obvious start and then onto their financial statements.
If you've never dealt with financial statements, they can be quite daunting with their structured layout, mass of numbers and even more footnotes. So it would be good for you to start reading about financial statements and what they tell an investor—how the three different statements, Income Statement, Balance Sheet and Cash Flow statement, are tied in with one another and what each one says about the company.
Once you have a firm grasp of the basics, introduce yourself to financial ratios and ratio analysis. This is where all the infamous acronyms you hear on TV start jumping out at you: EPS, P/E, ROE, ROI and so forth. Ratios will provide more in depth information about the financial statements and allow you to compare the financial statements of one company to another, even if they are different in size, located in different markets or different industries.
So now that you can read financial statements, understand them and comprehend what use financial ratios have in analyzing a company, you can move forward to analyzing the company at hand. However, instead of starting from scratch, you should search the internet to see what other professional analysts have said about the specific company. It is very likely that the company is covered by several analysts and you can have varied opinions on the same firm. You will be able to see what they focus on and, hopefully, they will explain why the company is a good or bad investment from their point of view.
Now after going through that process of educating yourself about the investment, the financials and reading others opinion, can you go and invest in that stock that you've done so much work on. This process would be the same if this was a different type of investment, as it is essential that you thoroughly educate yourself about valuing the investing instrument and gathering information on what the risks and benefits are for this asset. In the end, this will allow you to make an educated decision on what you believe is the best route with your hard earned money.
By InvestorGuide Staff
Posted in ...Investing