How to Become an Investor: A Beginners Guide
Do you want to become an investor? Do you even know what an investor is? It can be a daunting prospect if you have never made investments before. An ‘investor’ is someone who uses their money to make a profit, by putting this money into various financial schemes. Everyone can invest, and whilst investing can make your money go further, it is not without its risks so make sure you fully understand these risks before you proceed with any investing! This guide will help you understand the world of investment a little more and get you started.
Choose a Type of Investment
There are lots of different types of investment. Here are some of the most common.
- Shares – where you buy shares in publicly listed companies. If the share price of the company improves and goes up, you get a return, but you can also lose money if the share price falls. Shares can also pay dividends. Dividends are a proportion of the company's profits distributed among shareholders. There are many easy ways you can invest thanks to technology, check out the new Kiwi company that allows you to invest in Kiwi and US Shares. Be sure to only invest in an amount you can afford. Often investing apps allow you to set up a regular automated transfer from your bank straight into your investment account, you can then automate your investments making the whole process simple and easy!
- Managed funds – a fund is another way for you to buy shares. However, instead of you researching and choosing the individual companies to invest in, you invest in a fund. The fund you invest in will be managed by an expert who will pool your money with other investors to buy shares, bonds, and other types of investment. This is probably the easiest way to invest with little knowledge and minimal expertise required.
- Bonds – buying a bond essentially means you are lending money, usually to the government or to a company. Governments and companies issue bonds as a way of raising money, and they promise a rate of return. This rate of return is typically higher than what you get in a bank savings account. While bonds are generally considered a low-risk investment, investing in bonds still carries a level of risk.
- Property – you can purchase either commercial or residential property as your investment. You can then rent the property to tenants, potentially giving you a regular income. You can also make money from property when the value of the property rises over time. As with other types of investment, nothing is guaranteed. The value of property can fall, for example, or you might have periods of time where the property is vacant.
- A business – many businesses look for fast startup funding, from traditional companies to innovative opportunities in fields like technology, life sciences, and renewable energy. The return on your investment will depend on business performance, profits, and market value.
It's important to also highlight one specific type of investment that just about everyone in New Zealand should have – a KiwiSaver. This is a long-term investment similar to a managed fund, but with Government-backed incentives and benefits. If you want to know more about your KiwiSaver, check out our article here on ‘Everything You Need To Know About Your KiwiSaver’.
Answer the Question: Is Becoming an Investor the Right Choice?
Becoming an investor is not right for everyone. It takes time, there are risks involved that mean you could lose money, and the initial learning curve can be steep.
Plus, there are other options, such as putting your money into a savings account where you will get a guaranteed rate of return and don’t have to lift a finger.
There are other things to consider, as well. If you have a lot of outstanding debt, for example, you might be better off financially over the short-medium term if you use your money to reduce your levels of debt rather than investing. This particularly applies if the debt you have is expensive, such as on high-interest loans and credit cardscredits.
In other words, the money you make by investing might be less than the interest you are charged on your debt.
Answer the question: Why Do You Want to Become an Investor?
Do you want to make investments to enhance your overall wealth over time and plan for the future? Are you looking at becoming an investor for a living? Do you have a different reason for wanting to become an investor?
The answer to these questions will help you decide the type of investment that is right for you. For example, investing in stocks or managed funds typically (although not always) results in a positive return over the long-term. However, there is often minimal, if any, income in the early stages, even if you have a large amount of money to invest at the start.
If a steady income is what you are looking for, putting your money into a savings account or investing in bonds might be the better choice.
Decide How You Want to Balance Risk and Return
There is a wide range of investment types to choose from, and they each carry a level of risk. In general terms, the greater the risk, the greater the potential return. Of course, the flip side is true too, i.e., you can win big, but you can lose big too!
So, you need to decide what type of investor you want to be by understanding the balance between risk and return that you are comfortable with.
Follow the 7 Rules of Investing
- Remember, nothing is a sure bet when it comes to investing. This is particularly important if you are receiving investment advice. Nothing is guaranteed, and you shouldn't let anyone convince you otherwise.
- Spread your investments on different assets as much as possible. For example, don't put all the money you have into shares in a single company. Instead, develop a portfolio where you invest in multiple companies and other types of investment. This lowers your overall risk.
- In the real world, investing is a slow and steady race. This particularly applies if you are investing in shares or managed funds. Therefore, the timeframe you should be thinking about should be in the region of five to 10 years.
- Don't act on impulse, either when buying or disposing of an investment. Investments go up and down, but trends over the long-term are usually much steadier. So, go long rather than acting on impulse. Resist the urge to check your investments daily, instead wait it out and before you know it you’ll have returned more than you realise on your investments.
- Regularly review your portfolio of investments to ensure they continue to meet your risk preference whether you are a low, medium or high risk investore and are performing as you expect.
- Never invest more than you can afford to lose.
- Do as much research as you can before making an investment. Don't just take advice from your mate down the pub. Even if you are investing in a managed fund or a KiwiSaver, there are multiple options to choose from, so research is essential.
Please note, these investments are just tips, not expert financial advice. It is wise to speak to a financial advisor before making any significant investments.
