Nobody invests with the goal of losing money, but the lure of hot stock tips and investing because of a dream or hunch tends to be more popular than doing the difficult, time-consuming research safe investing requires. Even using an investment advisor or certified financial planner requires due diligence to improve your chances of working with a knowledgeable, skilled professional. Any time you work with your hard-earned money, you should devote as much care and effort to examining how and where you invest it as you spent earning it.
Determine how much money you can afford to lose. Never invest money you will need in the foreseeable future, because you may be forced to sell out a stock holding at a temporary low in order to pay an emergency bill. Also, your investment may drop significantly in value due to unforeseen events at even the largest company, for example, in the early 2000s, Enron investors lost everything.
Determine your investment goals. If you want safety, confine your investing to blue-chip stocks -- those that are listed on the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 100 (S&P 100) indexes. If you want income, buy high-quality dividend-paying stocks.
Research the stock you are considering. Examine decisions of management, historical earnings growth, growth of stockholders' equity, potential for future growth, and whether the amount of current assets cover current liabilities.
Select companies in industries you know well. Knowledge is your best protection against making bad investment,s though even the most attractive company can fail if it has serious union trouble, a bad product, a scandal or significant damage owing to a natural disaster or destructive event.
Invest your money in equal portions at regular intervals over time so you lessen your chance of spending all your money to buy a stock when it hits a temporary high market price. This is called dollar-cost-averaging and is one of the tried and true methods of moving money into the market.
- Mutual funds allow diversification of your investment dollars. If you have less than $50,000 to invest, a mutual fund may be your wisest choice for the protection diversification provides.
- Always be aware of fees charged by brokers and mutual funds. These may be transaction fees or management fees, but they can significantly cut into your profits.
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