There are a number of ways of making money through investing, and a number of ways of losing money, too. The challenge is to apply a realistic mindset and a healthy amount of skeptical thought prior to applying your hard-earned money. The first step in investing is to think carefully about how much personal tolerance you have for the vagaries of the securities markets. Think about the people who invested heavily in Enron, only to see their money rapidly disappear as the scandal broke in the early 2000s. The chances of losing money are, unfortunately, greater than the chances of making big profits.
Determine your investment goals. You can invest for income or profits. Bonds, preferred stock and dividend-paying common stock will all provide income. If you want profits, trading common stock is the way to go.
Open an account at a reputable full-service online brokerage firm (such as Charles Schwab or TD Ameritrade) that has interactive decision making tools, research reports and company news services. Learn to use all these assets in selecting your investments.
Create a list of possible investments by selecting industries you know something about then selecting companies that have a history of good earnings growth, good management, growth in shareholder equity and good future potential. If you want income producing investments, check to see if the current assets are at least as large as the current liabilities.
Narrow your investment choices and read the quarterly and annual reports of those companies as well as any stock analyst reports. Check news releases so you know if there is anything of concern on the horizon.
Examine the interactive price charts of your final choices to see where their prices stand with respect to their historical trading ranges. This will help avoid buying in at a temporarily high price and watching it decline over the near future.
- The interest payments from bonds and preferred stock is taxed as ordinary income but dividends are taxed at a lower tax rate. Long-term holdings have different tax treatment than short-term (under one year) holdings. Tax treatment on investments changes so check with your accountant before making tax-related investment decisions.
- Never invest money you cannot afford to lose, unless you are buying U.S. Treasury securities that are guaranteed by the full faith and credit of the U.S. government. Never borrow money to trade stock and never use money you might need in the foreseeable future because you may be forced to sell out your investment to pay a bill right when the price is at a temporary low.
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