Investing is a great way to grow wealth, but if it's not something you've done before, you may be overwhelmed getting started. The good news, however, is that investing really isn't rocket science. If you follow a few basic rules, you can enjoy the same success any seasoned investor would. Here are some important tips to start with.
1. Stick to investments you understand
When it comes to buying stocks, you have choices. There are numerous segments of the market you can dabble in and different companies within each segment. But as a general rule, you're better off investing in companies whose products, services, and business models you understand.
For example, say you're an avid Netflix (NFLX 0.10%) user. You may decide to buy shares of Netflix because you understand how the company generates revenue -- it's not all that complicated. But if there's a company whose revenue streams are more ambiguous, you may want to skip it.
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2. Aim for diversity in your portfolio
A diverse mix of investments could open the door to substantial returns over time, all the while shielding you from losses. You can diversify your portfolio in a number of ways. First, you could go out and buy stocks from a number of different market segments -- for example, some bank stocks, energy stocks, biotech stocks, and tech stocks. Or you could minimize the legwork involved by buying index funds.
Index funds are set up to track and match the performance of existing market indexes, like the S&P 500. They effectively allow you to own a bucket of stocks with a single purchase, and while you won't beat the market with index funds, you'll enjoy your share of gains when the broad market does well.
3. Commit to a regular investing schedule
Some new investors aim to time the market and end up overpaying for stocks and missing out on key buying opportunities. A better strategy is dollar-cost averaging, where you commit to investing a certain amount of money at preset intervals over time.
For example, you might decide you're going to buy shares of Netflix every month, regardless of where the company's stock price is. While there may be times when you get stuck with a higher share price, you're likely to snag a discount on your average share price over time with this system in place.
4. Look to the future
Scooping up stocks and selling them quickly is a strategy that rarely works out well. If you're looking to succeed as an investor, a buy-and-hold strategy is a far better bet. All this means is choosing quality stocks and keeping them around for many years so they gain value over time.
Netflix, for example, was worth about $83 a share five years ago. As of this writing, it's trading at about $558 a share. Meanwhile, Netflix was worth about $369 a share a year ago, so that may have seemed like a good time to sell. But look at where it's at today by comparison.
Of course, Netflix is just one example of a stock whose performance has held up well. The point is that if you invest in the right companies, you could really end up doing quite well for yourself in the long run.
Investing for the first time can be intimidating -- but it doesn't have to be. Stick to these key tips, and chances are, you'll be sitting on a solid portfolio before you know it.
