Contrary to popular belief, the stock market is not just for the rich. Investing is one of the best for everyone to enrich themselves and become financially independent. The strategy of investing a little money on a regular basis can eventually result in a snowball effect. This effect means a small amount of revenue can generate momentum leading to exponential growth. To achieve this task, you must follow the right strategy and remain patient, disciplined, and diligent. These instructions will help you get started with investing in small but smart amounts.
Step
Part 1 of 3: Preparing to Invest
Step 1. Make sure the investment is the right thing for you
Investing in the stock market involves risk, and this includes the risk of losing money permanently. Before investing, make sure you are able to meet your basic needs, just in case you lose your job or face a bad situation.
- Make sure you have 3 to 6 months worth of savings from your monthly income. This ensures that if you really need money fast, you don't have to sell your stock. Even relatively "safe" stocks can fluctuate greatly, and there's a good chance your stock could cost less than when you bought it.
- Make sure your insurance needs are met. Before allocating a portion of your monthly income to investing, make sure you have the right insurance for your assets and health.
- Remember never to rely on your investment money to deal with urgent needs, because investments do fluctuate over time. For example, if your savings were invested in the stock market in 2008, and you had to take 6 months off due to a serious illness, you might be forced to sell your stock at a 50% loss because the market price dropped at that time. By getting the right insurance and gifts, your basic needs will always be met, regardless of the ups and downs of the stock market.
Step 2. Choose the right account type
Depending on your investment needs, there are several types of accounts you can open. Each of these accounts represents the vehicle in which you deposit your investment.
- Collectible accounts refer to accounts where all investment income earned in the account is taxed in the year it was received. However, if you receive interest or dividends, or if you sell stock for a profit, you must pay the necessary taxes. Also, money will not be penalized on these accounts, as opposed to investing in taxed accounts.
- The traditional Individual Retirement Account (IRA) involves withholding tax contributions, but limits the amount you can contribute. IRAs don't allow you to withdraw funds until you reach retirement age (unless you pay the penalty). You must start withdrawing funds at the age of 70. These withdrawals will be taxed. The advantage of an IRA is that all investments in the account can grow and are tax-free. For example, if you have shares worth Rp10,000,000,00 and receive 5% (Rp500,000,00 per annum) in the value of the dividend, this means that Rp500,000,00 can be reinvested in full, instead of decreasing because it has been taxed. In the following year, you will get 5% of the amount of IDR 10,500,000,00. Another option is to lose money because you are subject to an early withdrawal penalty.
- Roth's Individual Retirement Accounts do not allow untaxed fund contributions, but do provide the option of withdrawing tax-free funds at retirement. This account doesn't require you to take money at a certain age, so it can be a good option for transferring wealth to an heir.
- All of these options can be the right vehicle to invest in. Take the time to study the options before making a decision.
Step 3. Calculate the average cost of the currency
As complex as it sounds, it really just refers to the fact that -- by investing the same amount each month -- your average purchase price will reflect the average share price over time. This method reduces risk because by investing a small amount of money at regular intervals, you reduce your chances of making a big investment before a big drop in price occurs. This is the main reason why you should invest monthly on a regular basis. In addition, this method can also reduce costs, because when the stock price drops, your monthly investment can buy more stocks whose prices are falling.
- When you invest money in the stock market, you buy it at a certain price. If you can spend Rp5,000,000.00 per month, and your share price is Rp50,000,00, you can buy 100 shares.
- By spending a certain amount of money on the stock market each month (eg Rp. 5,000,000.00 earlier), you can lower the price you paid to buy the stock, so you get more money when the stock price goes up (because you bought it at a higher price). low).
- This happens because when the stock price goes down, your monthly investment of IDR 5,000,000,00 will be used to buy more shares, and when the stock price goes up, the investment amount will only get fewer shares. The end result is that your average purchase price will decrease over time.
- It's important to understand that the situation is also the other way around -- if the stock price continues to rise, your monthly contribution will only get you fewer shares, so your average purchase price increases over time. However, your stock will still increase in price, so you will still make a profit. The key is to be disciplined to invest at regular intervals, regardless of the price, and avoid trying to "read the market".
- At the same time, your small contributions made on a regular basis will ensure that relatively large sums of money are not invested before the market price drops, so you are exposed to less risk.
Step 4. Learn the concept of compounding
This concept is an important concept in the investment world, and refers to stocks (or assets) that generate income based on reinvested earnings.
- The explanation can be done through illustrations. For example, say you invest $100,000 in stocks a year, and the stock pays a dividend of 5% annually. At the end of the first year, you will earn IDR 10,500,000,00. At the end of the second year, the shares will still pay out 5%, but now this 5% calculation is based on the amount of IDR 10,500,000,00 you own. As a result, you will get IDR 525,000.00 of dividends, instead of just IDR 500,000 in the first year.
- Over time, the money you can earn can grow enormously. If you let that $100,000 amount remain in an account that earns 5% dividends for 40 years, its value will be more than $70,000,000. If you keep adding $10,000,000 every year, the value will be $133.000,000.00 in 40 years. If you start adding $5000.00 per month in the second year, the value will reach almost $8.000.00 after 40 years.
- Note that since this is just an example, we assume the value of the stock and dividends to remain constant. In fact, this value is likely to go up or down, which could result in much more or less money after 40 years.
Part 2 of 3: Choosing the Right Type of Investment
Step 1. Avoid investing only in certain types of stocks
The concept of "don't put all your eggs in one basket" is key in the investing world. To start investing, your focus should be on broad diversification, or spreading your money across different types of stocks.
- Buying only one type of stock exposes you to the risk of losing the value of that stock, which may be significant. If you buy a lot of stocks in different industries, this risk can be reduced.
- For example, if the price of oil drops and the value of your oil stock decreases by 20%, perhaps your retail stock has increased in value because consumers are spending more money, which would normally be used to buy fuel. The stakes in your tech world may remain unchanged. The end result is that your portfolio doesn't lose too much.
- A good way to diversify is to invest in a product that provides you with this diversification. This includes mutual funds (mutual funds) or ETFs. Due to their nature of providing instant diversification, both of these options are good choices for novice investors.
Step 2. Learn about the investment options available
There are many different types of investment options. However, because this article focuses on the stock market, there are three main ways to study the world of stocks.
- Consider an ETF index fund. A free trade index fund is a portfolio of stocks and/or precious metals aimed at achieving certain targets. Often, this target is to track a broader index (such as the S&P 500 or NASDAQ). If you buy an ETF that tracks on the S&P 500 list, you are buying shares of 500 companies, which means you have broad diversification. You don't have to over-manage these funds, so this means clients don't have to pay a lot for their services.
- Consider an actively managed mutual fund. This fund, also known as an active mutual fund, is a pool of money from a group of investors, which is used to buy a pool of stocks or precious metals, depending on the strategy or objectives. One of the advantages of mutual funds is professional management. These funds are overseen by professional investors who invest your money in a diversified way and will respond to market changes (as described above). This is the main difference between mutual funds and ETFs -- mutual funds involve managers actively choosing stocks based on a strategy, while ETFs only track a specific index. One downside is that mutual funds are usually more expensive than ETFs, because you have to pay extra for more active management services.
- Consider investing in private stocks. If you have the time, knowledge, and interest to do some research, private stocks can yield significant returns. Be aware, however, that, because these funds are not like highly diversified mutual funds or ETFs, your individual portfolio will be less diversified, making it more risky. To reduce this risk, avoid investing more than 20% of your portfolio in one type of stock. This method can provide some of the diversification benefits provided by an ETF or mutual fund.
Step 3. Find a broker or mutual fund company that can meet your needs
Use the services of a broker or mutual fund firm that will invest on your behalf. Focus on the cost and value of the services provided by the broker.
- For example, there are account types that allow you to deposit money and buy for very little commission. An account like this might be a good fit for someone who already knows how to invest in what they want.
- If you need professional investment advice, you may want to look for a place that charges higher commissions in return for better customer service.
- Since there are many brokerage firms that offer discounts, you should look for a place that charges low commissions, but still meets your customer service needs.
- Each brokerage firm has a different price list. Pay close attention to the details of the product you want to use as often as possible.
Step 4. Open your account
Fill in the personal information form that will be used to order shares and pay taxes. In addition, you will transfer money to the account that you will use to purchase your first investment.
Part 3 of 3: Focusing on the Future
Step 1. Be patient
The main challenge that prevents investors from seeing the huge effects of the above-mentioned compounding methods is a lack of patience. Yes, it's hard to see small money growing slowly, other than sometimes the amount of money will decrease. However, you have to be patient.
Try reminding yourself that you are playing a long-term game. The lack of large profits that are immediately obtained should not be seen as a failure. For example, if you buy a stock, know that it will fluctuate and result in gains and losses. Usually, the stock's performance will decline before increasing. Remember that you're buying a piece of a concrete business, so in the same way you won't be discouraged if the value of the gas station you own decreases within a week or month, just as when the value of your stock fluctuates. Focus on the company's revenue over time to gauge its success and failure levels. Let the stock work on its own
Step 2. Maintain your speed
Concentrate on the speed of your contribution. Stick to the amount and frequency you set earlier and let your investment grow slowly.
You should be grateful for the low price! Calculating average market costs is a sound and proven strategy for multiplying wealth in the long run. Furthermore, the cheaper the stock price, the brighter your prospects for tomorrow will be
Step 3. Follow the information and look forward to the future
In today's world, with technology that can provide you with the information you need instantly, it's difficult to see the next few years while monitoring the progress of your investment balance. However, for those who do, their snowball will continue to grow and increase in speed, so that their financial goals are achieved.
Step 4. Stay on track
The second biggest obstacle is the temptation to change strategy by aiming for a quick return on an investment that has recently made big profits, or selling an investment that has recently suffered a loss. This is the exact opposite of what successful investors do.
- In other words, don't just chase immediate profit. Investments that earn very high returns can also drop drastically in an instant. The "pursuit of immediate profit" often results in disaster. Stick to your original strategy, assuming that it has been thought through.
- Be consistent and don't go in and out of the market. History shows that exiting the market on four of the five biggest days of any calendar year can make the difference between earning and losing money. You will not recognize these days until they have passed.
- Don't try to read the market. For example, you may be tempted to sell when the market price drops, or avoid investing because you feel the economy is in a recession. Research has proven that the most effective strategy is to invest at a steady pace and use the averaging cost strategy discussed above.
- Studies show that people who calculate cost averages and stay invested perform much better than people who try to read the market, invest large sums of money each year in the New Year period, or who avoid the stock market.
Tips
- Ask for help at first. Consult a professional or a friend/family member with experience in finance. Don't be too proud to admit that you don't know everything. Many people will be happy to help you avoid early mistakes.
- Keep abreast of your investments to find out taxes and budgets. Having clear and easily accessible notes will make it much easier for you later on.
- Avoid the temptation of high-risk investments that quickly turn out to be profitable, especially in the early stages of your investment activity. You can lose it all with just one wrong move at this stage.
Warning
- Be prepared to wait before you get a significant return on your investment. Low risk investments in small amounts take a long time to make a profit.
- Even the safest types of investments carry risks. Don't invest more money than you can afford.
