Investing is the key to long-term wealth production. During times when interest rates are especially low, and inflation is more problematic, you may want to learn how to become an investor to make extra money. Regardless of your specific long-term financial goals, investing could play a significant part in getting there.
If you want to start investing in stocks, bonds, funds, or anything else, the first step is learning the basics. In this article, we will introduce you to:
- What an investor is
- Why become an investor
- How investors make money
- How you can become an investor
- Practical steps for getting started
What is an Investor?
An investor is anyone (or any organization) that allocates capital with the intention of making a profit. The scale of the investments or the specific properties, schemes, or other assets an investor’s capital is allocated towards are irrelevant to the basic definition.
Anyone or any organization with spare money to invest can become an investor. Investors come from all walks of life. Some of the most common reasons individuals start investing include:
- Building savings to live off during retirement
- Working up to buying a new property
- A wide range of long-term goals requiring wealth
With these basics out of the way, there are a few important things to keep in mind:
- Investing always has some level of risk, but the risk can be minimized through strategy.
- Direct investing is hard, but you don’t need to do all the hard analytical work yourself.
- Following that logic, many people invest in funds where professionals manage portfolios for them.
- The responsibilities each individual investor takes on may differ significantly.
How Does an Investor Usually Get Paid?
There are a few ways investors can produce a profit from the market.
Selling at a Profit (Producing Capital Gains)
If you buy any security and later sell it for more than you bought it for, you’ve profited from investing.
Dividends
Dividends are a type of compensation dispersed to equity investors. Companies pass on a portion of their profits to shareholders. As partial owners of a company, shareholders are entitled to a portion of the companies’ profits. Dividends are dispersed according to each shareholder’s number of shares.
Interest
Interest is paid out to holders of debt instruments such as bonds. When you own another person or institution’s debts, you profit from interest on top of their repayments.
Tax Breaks
While it isn’t a form of income, smart investment strategies can save you more money through tax incentives. This is particularly true of certain retirement accounts. Your contributions to tax-advantaged accounts can lower your tax burden.
How to Become an Investor in 5 Steps
If you want to get started in the world of investing, you can do so with a few practical steps.
1. Study the Basics of Investing
Investment is a heavy topic. However, the most successful investors are very well-read and do tremendous amounts of research as a part of their job. They also leverage technology to optimize their returns.
To get started, you must understand these basics. After that, learn the basics of any kind of investment you are getting into. For example, if you want to invest in stocks, delve into the industries and sectors you are considering investing in.
2. Decide What You Want to Invest In
This is a question of your investment goals. Your investment goals determine what investments and strategies make sense for you. Some common points of reference are:
- Passive, long-term investment strategies optimized for low risk will lean heavily on broad index funds.
- Investment strategies meant for optimal passive income will lean more heavily on bonds, other debt instruments, and stock selections filtered for higher dividends.
3. Open a Brokerage Account
To invest, you will need somewhere to buy investment assets and hold them; therefore, you will need to choose between the different types of investment accounts. Your brokerage account is where you will go to order assets and monitor your investment results.
4. Build an Investment Portfolio
Once you’ve opened a brokerage account, you’re ready to start building your portfolio.
By this point, you’ve thought through your investment goals and become acquainted with the asset classes you want to invest in. Building your portfolio will involve ongoing research, either on your part or through an advisor or fund manager.
5. Start Managing Your Portfolio
Portfolio management responsibilities will differ based on your investment strategy. For example, passive investing usually is long-term and involves fewer transactions. On the other end of the spectrum, the most aggressive strategies like day trading require a considerable commitment in time and energy.
As you continue to learn more and develop your portfolio, you will gain the skills you need to become a better investor and develop good investing habits. Even if you’re just invested in a broad index fund, you will want to track its progress. You can look at the fund’s overall performance and then look at each individual asset within the fund to gain experience.
Of course, other strategies will require much more managerial work on your part. For example, learning to manage a portfolio can be an exciting and rewarding experience. But for beginners, a more hands-off approach is normally more appropriate—for example, signing up for an investment app to have their portfolios managed on their behalf.
