There's no real bar to becoming an investor -- simply open a brokerage account and buy a few stocks, right?
Actually, a little more work is required. By investing in a publicly traded company, or other common investment vehicle, you'll necessarily be undertaking a longer and more-involved endeavor than do traders and speculators, who seek gains from short-term price movements.
To become an investor, you should decide on and articulate your objectives, identify and research investment candidates that fit those objectives, invest while committing to a defined holding period, and monitor your results on a weekly and quarterly basis. To understand how this process works, let's walk through each step in greater detail below.
Image source: Getty Images.
Decide on and articulate your objectives
The first and most-important step in the journey to becoming an investor is to put into words the reason you want to move your cash -- sitting safely in the bank -- into a higher-growth vehicle where it may be at risk. In other words, you'll increase your chances of success if you first understand why you're investing, and acknowledge that your capital has the potential to decrease, as well as rise in value, depending on how much risk you take.
Are you investing for retirement? Or perhaps your child's college education? Knowing, articulating, and writing down a single overarching investment goal will help you clarify the types of stocks, bonds, exchange-traded funds (ETFs), and other financial instruments you'll purchase as you build a complete investment portfolio over time.
Identify and research investment candidates
Many of you who try the four-step process advocated in this article will find that, after completing the first step, your objectives will fall into one of two very-wide categories: growth of capital, or income.
If you're seeking the appreciation of your funds, then investing in growth companies, which improve annual revenue faster than the overall market, is a logical way to put money to work. The same can be said of value stocks, which trade at a discount to the overall market, yet can rise once the investing herd recognizes their potential.
If you're after income, you'll probably at some point consider large capitalization, "blue chip" stocks, with dividends that generate a healthy annual yield for shareholders --anywhere between 1.5%-4%, or so. Bonds also remain a popular choice among those who desire an income-yielding investment. Bondholders receive regular interest payments, and like stocks, they can appreciate or depreciate in value.
Beginning investors can research investments in fairly easy fashion through sites like Yahoo! Finance and Google Finance. Of course, I'd also recommend visiting The Motley Fool homepage, where you can explore individual stocks, as well as find a wealth of information geared toward improving your investment chops.
Invest while committing to a defined holding period
Once you've selected the first holdings in your portfolio, chosen a broker, and clicked on "buy," it's time to let your money start working for you. If the length of a holding period is one of the chief characteristics that separates the investor from the trader or speculator, how do we define this length, often referred to as long term?
There is no single, agreed-upon definition; but we can look to accounting standards that define short-term instruments as those held one year or less. That's not a bad minimum baseline to use when you're starting out.
Think of long term as at least one year or more. If you commit to this holding period, you'll be compelled at the outset to choose companies of reasonable quality to buy into. For many investors, long term can mean five or even 10 years, and longer holding periods aren't uncommon among those who uncover truly great companies to invest in.
Monitor your results and evaluate on a weekly and quarterly basis
The amount of time you spend monitoring your holdings is entirely up to you. During trading hours, the movement of investments is but a click away, and you could potentially sink a good amount of time each day tracking the movements of your holdings.
Few would recommend such obsessive checking in, and for good reason: Beware! At the beginning of your investing career, you may find that it's mildly addictive to log in to your brokerage account and watch stock prices -- and the rising or falling value of your portfolio -- change in real time. This can lead to impulsive actions that you may regret in the future.
Personally, I don't recommend tracking your holdings on even a daily basis, except perhaps to check on news for the tickers you own, in case there's a need-to-know event.
While this may seem counter-intuitive, reviewing what happened with your investments once a week, with a clear head and, say, a cup of coffee on a Saturday morning, helps you gain proper perspective on your positions. In a contemplative atmosphere, you can ask yourself how your picks are faring against your written objectives. And you can make non-impulsive, actionable plans for further research, or to tweak positions.
In addition, do read quarterly reports. The SEC requires publicly traded companies to report their earnings to investors every three months. Getting familiar with the quarterly reports of the companies you own will enhance your decision-making, and make you less reliant on the opinions of analysts, investment pundits, and friends.
If you follow the process above, you're likely, at a minimum, to avoid rookie mistakes that can punish the first-time investor. Investing without a purpose, on a whim, or without research -- are all traps that lie in wait once your account is finally open, and the power to put money to work is in your hands.
But remember, with power comes responsibility; so use this process or one similar to it. After all, it's your own wealth that's at stake.
