Top 5 Things to Know About How to Start Investing

Investing truly is the ultimate wealth creator. According to Forbes, the majority of the world's one-percenters, 14% to be exact, made their fortunes in the finance and investment industry. For aspiring investors who wish to one day join the ranks of value investor, Warren Buffett, or private equity founder, Robert Smith, here are five things you should know about how to start investing.

It Takes Money to Make Money

This isn't to discourage aspiring investors who have limited capital to bet on the markets. That being said, if you have $100 to invest, it's impractical and financially dangerous to assume that you'll be multiplying that cash into triple or quadruple-digit percentages in a short span of time. And while most brokers now offer what's known as "leverage" which is essentially borrowed money, it is a risky maneuver best left to more experienced investors. Ultimately, you shouldn't expect investing to immediately supplant your main source of income unless you have a decent-sized portfolio and a backtested strategy that you know for a fact will net you profits over time.

Investing is Half-Technical, Half-Psychological

Technical and fundamental analysis helps investors make sense of market consensus and asset valuation. However, that is only half the battle. The other half is overcoming the psychological barriers that investors face when they have money on the line. Fear of missing out or FOMO and greed are the two main psychological barriers known to the investing community. FOMO forces investors to jump on every market turn and pull back out of fear that they will be left out when the market makes a massive lateral move. Greed, on the other hand, keeps people from exiting their position even though it has exceeded their initial profit target or stop loss. The latter simply refers to the amount of money that an investor is willing to lose before he/she liquidates the position.

Which Broker You Choose Makes a Huge Difference

Although every broker seems like they bring the same offerings to the table, the subtle differences can greatly impact your bottomline. For instance, what assets you can invest in, the roundtrip cost per trade, how fast each order can be executed, what investment tools and support resources are accessible, and how you can deposit/withdraw your capital can all collectively change your investing experience with a broker. Narrow your options down based on what market you plan on specializing in. You can also get a feel of each broker by opening a demo account and playing around with their platform.

Every Market is Different

It's not just about buying low, selling high. Although that is the universal principle that governs the world of investing, know that every asset and financial market has different macroeconomic catalysts, margin requirements per trade, KPIs, etcetera. For instance, while the price of gold might be impacted by the closure of mines in Chile, the stock price of mining companies in the same region may not move at all. As a novice investor, start by picking a financial market that interests you and then master the ins and outs of that niche. Only expand your portfolio once you're comfortable with that first market. And while the famous investing adage, "Don't put all your eggs in one basket", makes sense, it's foolish to invest in every possible investment product without an in-depth understanding of the category.

Investing and Trading Are Two Distinct Activities

Investing is buying into companies once you've determined their value based on objective factors, such as quarterly reports, financial projections, and brand positioning. Trading, on the other hand, is speculation. The latter is a riskier form of investing and tends to resemble the qualities of gambling since you leave a big portion of the outcome to chance. Knowing the difference is important so you can adjust your strategies and align your values with whichever activity you wish to pursue.

Knowing these five things about investing isn't enough to make you a successful investor. That being said, it gives you a solid foundation as you enter the unpredictable and risky world of investing. Any time you are inundated with technical reports and numbers or biased advice from investing pundits, distill the information and revert back to these fundamentals to give yourself clarity and order.