Basic Knowledge: How to Invest
- 1). Add up the assets you have available to invest and divide them into short-term and long-term categories. Money you expect to need within the next five years goes into the short-term category and should be invested only in safe vehicles like savings accounts, money market funds and certificates of deposit. Money you can leave invested for at least five years can be invested in bonds or the stock market.
- 2). Open an account with an online discount broker if you plan to buy individual stocks. If you prefer to diversify your holdings with mutual funds, contact several of the large low-cost mutual fund companies like Vanguard, Fidelity and TIAA-CREF. Request a prospectus for their index mutual funds. Studies like one published by "Money" magazine show that over the long run, index funds tend to do better than more costly managed funds. Index funds simply buy and hold all the stocks in a given index rather than buying and selling stocks in an attempt to beat the market.
- 3). Review the charges and expenses associated with each mutual fund, and choose the one with the lowest charges. An analysis of mutual fund expenses presented on the Motley Fool website found that some funds charge as little as 0.18 percent, so use that as your benchmark.
- 4). Complete the mutual fund application and submit it to the address listed on the form. Set up an automatic monthly investment, and use dollar-cost averaging to accumulate more shares when the market falls and fewer when it rises. Dollar-cost averaging simply means you put the same amount of money in the fund each month, regardless of how well or poorly the market is doing.
- 5). Contact your employer to see what kinds of investments are available. If you work for a private employer, you might have access to a 401k plan. If you work for a public agency, you could have access to a 403b plan. In addition to these retirement plans, your employer might sponsor an employee stock purchase plan that allows you to accumulate shares through payroll deductions.
- 6). Complete the enrollment application for your chosen employer-based plan. Put at least enough into your 401k or 403b plan to get the full company match. If you fail to do so, you are literally turning down free money. Just consider that if you work for an employer that matches 401k contributions 50 cents on the dollar up to 6 percent and you make $30,000, the value of the company match is a full $900. Failing to participate in the plan means you are turning down $900 in free money. This figure is derived by multiplying the $30,000 annual salary by 3 percent (half of 6 percent, since the hypothetical employer matches 50 cents on the dollar).
Source...