What's the number one way to lose money while investing? Easy. Not understanding your market.
That's how Warren Buffet became so successful. Well, one of the ways anyway. He has a policy of only investing in companies he understands and believes in.
But what do you do when you're starting?
Here are three examples of financial markets most investors take part in. We talk about how they generally work and why you should consider investing in them. We also cover the biggest risks associated with them.
Of course, you've heard of the stock market. It's the most well-known financial market in existence. And despite its volatility, many say it's one of the safest forms of a financial investment you can make. That is if you follow a few simple rules.
Rule 1: Very few people can pick winning stocks. And we herald these people as kings because the gift is truly so rare. So if you're not Warren Buffett or Peter Lynch, don't try to pick winning stocks.
Instead, follow the S&P 500. The general market typically provides a return between 8% and 12%. Individual stocks can crash and burn.
Rule 2: Invest for the long term. Money is nearly always lost in quick trades over the long run. Buffett advises, "If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes."
Rule 3: The market always goes up - in the long run. Of course, there are dips. Sometimes there are even massive failing markets. This happened in the 2008 collapse or the collapse in '87.
But look at the years following that. The market regained its status before the loss and kept going up. If it doesn't, then something much more serious is going on, and we won't be worrying about the market anyway.
People invest in the stock market to protect against inflation. Inflation is the idea that your dollar has less buying power over time.
The general return of the stock market is between 8% and 12%. By following the S&P 500 or the NASDAQ, the stock market provides a return that far outpaces inflation.
If you're going to lose money in the stock market, it's because you aren't investing for the long run. You can lose money by trying to pick and sell individual stocks and time the market. You can lose money by panicking in a collapse.
Bonds are essentially a loan you provide to a company or government or municipal body. The bond has a set interest rate and a set time length.
Bonds protect against deflation, and this is an important part of a secure financial plan too. The economy always has fluctuations in inflation and deflation. You need to protect against both.
Bonds are typically very safe. The biggest risk comes with inflation.
If inflation is terrible over a period, your money will have less buying power than when you bought the bond. There are ways to protect against that, but they go beyond the scope of this article.
The real estate market is the buying and selling of real estate property. That's homes, condos, duplexes, apartment complexes, and even land.
The real estate market is another market that historically has great returns. And there's a lot of ways to invest in the real estate market.
You can get rental properties. You can flip properties. You can simply buy and hold homes for a few years or a decade and sell them at a profit. That's thanks to the typical growth of the real estate market.
If people lose money in real estate investments, it's because of a market crash like in 2008. You need to understand the real estate market to avoid "lemon" properties that will cost money.
Use these examples of financial markets to start investing. What markets interest you most? What sounds safest? What combination of market investments will help your long term financial success?
This a starting point. Now go forth and study your markets of interest.
Curious about how you can take advantage of the different financial markets like these? Learn how stock loans work, and take advantage today!
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