Being an investor doesn’t require a degree or any other credentials. Anyone living in a capitalist society can become an investor. Yet the word “investor” carries a lot of meaning and subtleties that can make the journey to becoming an investor unnecessarily complicated.
In this post, you’ll find out how to become an investor. First, we’ll define who an investor is. Then, we’ll outline different types of investments that are available and end with specific steps to becoming an investor.
Who is an Investor?
If we want to know how to become an investor, we first should get clear on who an investor is.
An investor is anybody who puts money into an enterprise or property with the expectation of making a profit. Furthermore, an investor expects to profit from the efforts of others — for example, the employees and managers of the company issuing stocks or bonds.
Investors are paid to take on risks.
They pay the money today and expect the profit in future. Even for seemingly safe investments like bank deposits, there are always risks: Inflation or exchange rates could decrease the purchasing power of the money you’ll withdraw in future.
What sets successful investors apart from their less fortunate peers is that they understand how to evaluate risks and manage them accordingly.
For an investor, a risk is not just about losing the bet, as in a gamble.
Instead, investors think about different aspects of risk:
- Market risk: The market price of your investment might go up or down. Over the medium to long term, market volatility could be due to any number of fundamental factors (for example, the company that issued the stock could be losing customers) affecting a company, its sector, or even the market as a whole. And within a trading day, short-term price fluctuations could seem almost perfectly random. The key takeaway is that the market risk means there is no guarantee you’ll be able to sell your security for the same price you bought it.
- Liquidity risk: An investment is “liquid” if you can easily sell it. U.S. Treasury bills are some of the most liquid investments because there are lots of buyers and sellers, and generally they all agree on price. On the other hand, real estate investments are illiquid because even at the best of times, buyers are few and far between.
- Concentration risk: If all your investments are in the same asset class and in the same industry or investment themes, your portfolio could become too concentrated. If something goes wrong, the values of these concentrated investments will go down at the same time, and your whole portfolio will take a hit. That’s why most financial advisors stress the importance of diversification, i.e., spreading your risks across different types of investments.
Luckily, there are plenty of investment opportunities to ensure that your portfolio is diversified.
Types of Investments
New investors are often drawn to just one asset class, whether it’s the stock market or real estate. Yet as we’ve seen, it’s important to invest in different asset classes to ensure that your portfolio is diversified.
Before we dive into how to become an investor, let’s first explore different types of investments that are available:
- Equities: Also known as the stock market or simply stocks, equities include a wide range of mutual funds, index funds, and ETFs (exchange-traded funds) that give you an opportunity to buy a share of a company or a portfolio of companies.
- Fixed income: Bonds are the best-known securities in this asset class, which also includes a wide range of instruments that pay a fixed interest.
- Real Estate: Properties can generate rental income, and over the long term, real estate prices tend to increase with inflation. Besides owning properties outright, investors can also invest via REITs, or real estate investment trusts, a special type of stocks.
- Private businesses: Some investors put money directly into privately held enterprises, typically small businesses, that produce stable cash flows and offer some control. For someone without first-hand experience in a particular business, this is a very high-risk option.
- Startups: These are not just any early-stage private businesses. Startups are companies that are expected to generate a lot of growth. For example, an angel investor might invest $50,000 for a probability to turn this into $1 million. And if that probability is more than 5%, then the deal is profitable. $1 million x 0.05 = $50,000 (the same as the original investment).
This is not an exhaustive list of types of investment opportunities. But it’s a good illustration of the wide range of choices for any investor.
Are any of these investments better than the others?
This depends on your goals. And understanding your goals is the first step to learning about how to become an investor.
How to Become an Investor in 5 Steps
Now that we’ve seen who an investor is and what they actually invest in, it’s time to put this into action.
1. Create an Investment Plan
An investment plan is like a map to your desired financial destination. It could be a complicated excel spreadsheet with lots of formulas, but the start is very simple.
As the first step, you should understand and ideally write up your answers to several questions:
- What is your end goal? Have a clear number and time horizon in your mind.
- How much money do you already have to invest? If you already have a nest egg saved up, this could be a great source of income that you could reinvest.
- How would you invest each month or year? Investing in regular intervals is a great way to build a habit.
- How much risk are you willing to take? You should think carefully and realistically about your risk tolerance. And you should understand the impact that corrections might have on the likelihood of achieving your goals. The further away in the future your goal is, the more time you have to recover from any setbacks.
Answering these questions will help you identify what assets to include in your portfolio.
2. Open a Brokerage Account
This is the easiest step. There is not much point in shopping around for a brokerage: They mostly have the same prices and offer the same markets and functionality.
The only reason might be to find a broker with a web or mobile app that works best for you.
One thing you can safely ignore is any “research” brokers offer. Brokers don’t care if you make a profit. Their main objective is to get you to trade more so that they can earn more commissions.
3. Build an Investment Portfolio
Now that you’ve got an investment plan and a brokerage account, it is time to buy assets for your investment portfolio.
While there are lots of stocks to choose from, one solid way to start would be buying some dividend stocks. That’s because when you receive the first dividends — even if the absolute sum is small — it all clicks that investing really works.
4. Save Money and Add to Your Investing Strategy
Regularity is the key to a successful long-term financial plan. The easiest way is to just immediately transfer part of your income straight into your brokerage account and regularly execute on your investment strategy.
5. Regularly Review Your Portfolio
It’s good practice to review your portfolio. Growth is great, but it could also make your portfolio unbalanced, increasing concentration risk. At that higher price, a correction in the price of that asset would have a larger impact on your whole portfolio.
Yet this doesn’t mean that you have to sell stocks. If you regularly add money to your portfolio, you can just buy more of the asset that hasn’t yet gone up in price. That would help to bring your portfolio back to your original plan.
Now Is the Time to Become an Investor
In this article, we’ve covered a lot of ground. We’ve started with identifying who an investor is: It’s someone who’s paid to take risks in expectation of future profits. After that, we’ve covered different types of investments. And finally, we’ve outlined the specific steps to becoming an investor.
If this all looks too complicated, do not despair. You do not have to learn this on your own. You can kick-start your journey to income investing with Investors Alley’s Forever Dividends Masterclass, a course that will teach how to become an investor in four live classes.