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Investment Planning 101 – Getting Started on Investing

Investing in securities may be a game - but only for people who can afford to lose a lot of money or veterans who play the securities investment game expertly. If you belong to neither category, it's best that you make a concrete investment plan so you can protect your interests and your money.

The following are the steps you must accomplish if you are a new and inexperienced investor:

1. Identify and define your goals.

What do you want to achieve? Why are you investing in securities? Answer these questions before doing anything else.

On a clean sheet of paper, write down the things you want to attain through securities investment. Are you saving up to buy a house or a car? Perhaps you're saving money for your children's college education or your retirement? Whatever applies, list them down. These are your investment goals.

Next to each item in your investment goals list, write down how much money you'd need to achieve it. You can do a simple calculation yourself or you can use estimators online.

Next, write down your projected timeframe for each investment goal that applies. If you are investing in securities to buy a car, when do you see yourself buying that car?

Someone once said, "Goals without timelines are just dreams." You need to have a timeframe for your goals so you'll have a way of evaluating your results. As you become more experienced in investing, moreover, you'll realize how important timeframes are in choosing investment products.

2. Determine your current financial status.

Now that you have clearly defined your financial goals, it's time to assess your current financial status. How much money do you currently owe in mortgages, loans, etc? How much do you currently have both in liquid and non-liquid assets?

On a clean sheet of paper, list all of your assets on the left. This list should include the money you have in the bank, home equity, cash value in annuity accounts, etc. On the right side of the paper, list all of your liabilities. This list should include your outstanding credit card debts, mortgage balances, loans, etc. Sum up your assets and sum up your liabilities. That's your net worth.

You are in great financial condition if your assets exceed your liabilities. If your liabilities exceed your assets, however, you can still turn things around by spending less and saving more.

3. Assess your monthly expenditure.

On a clean sheet of paper, write down your monthly income. Next, itemize your monthly expenses. Monthly expenses include food, rent, electricity, telephone, amortization payments, insurance premiums, money saved, money invested, etc.

The things of interest here are the money you "spend" on savings and investments. Specifically, your goal is to increase the proportion you spend on savings and investments.

4. Increase money "spent" on monthly savings and investments.

The more money you save and invest, the more attainable your financial goals will become. Thus, you must prioritize your saving and investment expenditures over other types of expenses. While you can't very well do away with rent and other essential expenses, you can cut down on your recreational expenses. For instance, you can eat out less often, take the subway rather than a cab and shop less.

You can also cut down on expenses by reducing your interest payments on loans and credit cards. For example, you should pay off high-interest cards and stick with low-interest products. Furthermore, you should not use a credit card if you know you can't afford to pay what you have put on it by the end of the billing cycle. Otherwise, you'd simply increase your debt, giving yourself a negative net worth (i.e. liabilities exceed assets) and making you unable to put money away for savings and investments.

Finally, you can also increase your monthly income and use the extra income for savings and investments. You can do this by getting an extra job.

5. Assess your risk tolerance.

How much risk can you tolerate? If you don't want to risk your money, you should stick to a regular account with your bank (savings, checking or certificate of deposit). Banks, however, are not known for paying their depositors high rates of interest. You should still have a savings account for emergency expenses, but don't expect to achieve your investment goals anytime soon through saving in a bank.

If you can tolerate a greater amount of risk, you should use your money to buy stocks and bonds. These investments carry higher risks and you could lose all of your money in a market downturn, but they also carry high rates of return. To minimize the risks, you can diversify your investments. You can also invest in already-diversified index funds or managed mutual funds.

Note: If you have decades before you need to cash in your investments, you should probably go for riskier products. In the long term, market shifts are normalized and you have time to bounce back from market slumps. If you choose a regular savings account, inflation could diminish your principal's purchasing power in the long run.

6. Choose your securities category.

If you decide to go ahead and invest in securities, you need to choose whether to invest stocks, bonds or funds. What are the differences among these three?

Stocks are ownership stakes in a company. If you buy stocks in a company, you may earn money in two ways. First, you may earn through dividends. Note, however, that not all companies pay their stockholders dividends. Second, you may earn through the appreciation of the shares you own.

For example, let's say you bought stocks at $10 per share. Now, your shares are $20 per share. Thus, your gross profit is $10 multiplied by the number of shares you own. You can sell your shares at this time to cash in your profit (and use such earnings to invest in other things), or you can hold on to your shares in the hopes of earning even more.

Bonds are debt instruments. By purchasing a company's bonds, you become this company's creditor. At the end of the lending period (say, 10 years) or earlier (if such is provided in the agreement), the company will pay you back your principal. Meanwhile, the company will pay you the agreed-upon interest at a preset payment schedule.

Funds are investment companies. Investing in securities is their main activity. Investing in a fund mean buying an ownership stake in the fund, not an ownership stake in the fund's underlying assets (the actual assets like stocks and bonds in which the fund has invested its money). You earn money through the appreciation of the value of your fund shares.

Among stocks, bonds and funds, funds are deemed to be the least risky. Between stocks and bonds, bonds are also considered less risky than stocks. Bondholders are creditors, and in case of bankruptcy, they are paid before stockholders. However, among all three, stocks bring the highest rates of return.

7. Choose your investment professional and start investing.

To actually start investing, you need to have a brokerage account. Unless you can make direct investments, you need a broker to place your buy and sell orders in the market on you behalf.

You may also want to procure the services of an investment adviser. An investment adviser provides investment advice, telling you which investments are good and cuing you when to buy or sell. Remember, investment advisers need to be registered as such with the SEC or with the state securities regulator.

There are also all-around financial planners that can help you clarify your goals, your financial status and your investment options. Financial planners give detailed and personalized advice and recommendations.

Whether you choose to hire a broker, a financial planner, an investment adviser, or all three just remember that financial professionals charge flat fees or commissions. The more financial professionals you hire, the more expensive investing becomes.

However, not getting any financial advice at all can be even more expensive. At least at the start, you should seek the guidance of somebody who knows the ins and outs of securities investing.

To avoid future problems, just be sure to do background research on any firm or professional with whom you do business. Make sure, too, to study the prospectuses, financial statements and other literature of any company in which you plan to invest. Finally, brush up on securities laws. Know your rights and your obligations.

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