How to Become an Investor (in 7 Easy Steps)

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How to Become an Investor

Becoming an investor is a process anyone can learn. There are several steps to follow, but if you take the time to learn each of them, you’ll be well on your way.

The most important thing to remember when becoming an investor is that it’s a journey, not a destination. There are no guarantees in investing (especially with the stock market), but if you follow these simple steps, you’ll be on your way to financial independence.

If you’re wondering how to become an investor, this article covers the specific steps to follow.

This article should not be taken as investment advice. Investing involves the risk of losing money, and you should do your own due diligence before investing. If you have questions about your situation, seek personalized help from a financial advisor.

How to Become an Investor in 7 Steps

Here are the steps to build a better future for yourself and your family through investing.

Step 1: Understand Basic Investment Principles

The first step to becoming an investor is understanding basic investment principles. This includes learning about different types of investments, how they work, and the risks and rewards associated with each.

Many resources are available to help you learn about investing, including books, online courses, and even investing apps. You can see our list of the best investing books for suggestions.

We also recommend the Moomoo app for educational content. Moomoo provides courses and tutorials within the app that teach important principles related to investing, particularly the stock market.

Step 2: Eliminate Bad Investing Habits

The next step is to eliminate bad habits as an investor. The specific habits will vary from person to person, but here are examples of some common destructive habits.

Allowing Emotions to Control Your Decisions

Emotional Investor

One of the most common bad habits is allowing emotions to control your decisions. An investor must be rational and make decisions based on facts and data, not emotions. Emotional investors tend to be reactionary and usually behind the curve rather than getting out in front.

If you tend to make impulsive decisions regarding investments, it’s important to learn how to control your emotions. One way to do this is by developing a written investment plan that outlines your goals and strategies. This will help you stay focused and disciplined when making investment decisions.

Trying to Time the Market

Another bad habit is trying to time the market. This refers to the attempt to predict when the stock market will go up or down and then invest accordingly. The problem with this strategy is that it’s impossible to consistently predict market movements.

To be a successful investor, you must focus on building a diversified portfolio of high-quality investments that can weather any market conditions. Trying to time the market is a recipe for disaster.

Trading Too Frequently

Frequent trading is a sign of a short-term approach. If you have a long-term approach, you should invest based on your plan and strategy. Avoid constant trades or changes in strategy that are likely reactionary and based on emotions.

Investing in Things You Don’t Understand

Investing in things you don’t understand is a surefire way to lose money. If you don’t understand how an investment works, make sure to do your research or consult with someone knowledgeable before investing any money.

Following Others Without Thinking for Yourself

Investing is personal, and what works for someone else may not work for you. Just because your friend or neighbor invests in a certain stock doesn’t mean you should do the same. Make investment decisions based on your goals, risk tolerance, and investment strategy.

Chasing Short-Term Returns

Chasing quick, easy profits is usually a losing proposition, as investments that have done well recently may not continue to perform at the same level. Pursuing quick returns may also lead to poor decisions or cause you to stray from your strategy.

Step 3: Develop Good Investing Habits

Once you’ve eliminated bad habits, it’s time to develop good ones. These habits will help you become a successful investor.

Some good habits for an investor include:

Focus on Learning Constantly

Investor Reading a Book

A successful investor is always learning. The investment world is constantly changing, so it’s important to keep up with new developments. You can do this by reading books and articles, taking courses, and listening to podcasts.

The more you know about investing, the better equipped you are to make sound investment decisions.

Automate Your Investing

One of the best ways to stay disciplined is to automate your investing. This means setting up regular investments into your chosen investment accounts.

For example, you can set up a monthly automatic transfer from your checking account to your investment account. This way, you’ll make regular investments without thinking about it.

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Prepare for Financial Emergencies

Before you become an investor, you should have an emergency fund that can cover at least three to six months of living expenses. This will help you weather any financial storms that come your way and avoid having to sell investments at inopportune times.

Pay Attention to Investing Fees

Investing fees can eat into your returns, so it’s important to be aware of your fees. Many investment accounts have annual fees, and some also have trading commissions.

You can keep your costs down by investing in index funds or exchange-traded funds (ETFs), which typically have low fees.

See our lists of ETFs:

Step 4: Determine Your Investment Strategy

Once you’ve developed good habits, it’s time to choose a strategy. There are two basic approaches as an investor: active and passive. There are successful investors using each strategy, so neither is right or wrong.

With an active investment strategy, you actively manage your investments. This means picking individual stocks or making other investment decisions yourself. An active approach requires more work but also gives you the potential to earn higher returns if successful.

With a passive investment strategy, you don’t make investment decisions yourself. Instead, you invest in a diversified portfolio of assets, such as index funds or ETFs, and let someone else do the work for you. Another option is to use a robo advisor that makes the decisions for you based on your personal situation. A passive approach requires less work on your part.

For example, real estate investors can take an active approach by purchasing and managing rental properties. This is a time-tested and proven way to build wealth but it also requires time and effort. Crowdfunding platforms like Fundrise, CrowdStreet, and Equity Multiple allow passive real estate investing for those who want a hands-off approach.

Your specific goals and timeline should also influence your strategy as an investor. For example, if you’re young and saving for retirement, you’ll want investments with high potential returns. If you’re about to retire, you may prefer investments that produce income, like dividend stocks or real estate crowdfunding.

Step 5: Build Your Investment Portfolio

Next, it’s time to start building your investment portfolio. Your portfolio is a collection of investments that you own.

The first step is to choose the right asset allocation for your portfolio. Asset allocation is the process of dividing your money among different asset classes, such as stocks, bonds, and cash.

Your asset allocation should be based on your goals, timeline, and risk tolerance. For example, if you’re young and have a long investment timeline, you may want to allocate more of your portfolio to stocks. If you’re retired and need income, you may want to allocate more of your portfolio to bonds.

Once you’ve determined your asset allocation, you can start investing in specific securities, such as stocks, bonds, and exchange-traded funds (ETFs). We recommend Public.com, Webull, and Moomoo for commission-free trades of stocks and ETFs.

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Step 6: Contribute to Your Investment Accounts Regularly

The best way to reach your investment goals is to invest regularly. This approach is often called dollar-cost averaging and refers to investing a fixed sum of money at specific intervals.

Dollar-cost averaging has the effect of smoothing out market fluctuations. However, investing a specific amount of money each month isn’t a requirement. What’s important is that you’re continuously working to add more money and grow your account balance.

Step 7: Evaluate and Diversify Periodically

Investors Reviewing Portfolio

Once you’ve started as an investor, monitoring your progress and ensuring you’re on track to reach your goals is important. At least once a year, look at your investment accounts and rebalance your portfolio if necessary.

Rebalancing involves selling some of your investments and using the proceeds to buy other investments. This process ensures that your portfolio stays diversified and aligned with your goals.

You should also periodically review your asset allocation and make changes if needed. For example, as you get older, you may want to gradually shift your portfolio from stocks to bonds to reduce risk.

Practical Tips to Start Investing

If you need to learn how to become an investor, here are some practical and realistic tips you can follow.

Today is Always the Best Time to Get Started

It doesn’t matter whether the market is heading up or down, starting now is the best approach. Over time, the market has historically trended upward, so investing early allows you to ride those long-term trends and reach your goals.

The sooner you start saving and investing, the more time your money has to grow. If you put off becoming an investor because of current market trends, you’re trying to time the market, and you may miss out on potential returns.

Investing is a marathon, not a sprint, so don’t let market fluctuations discourage you from starting now.

Don’t Be Afraid to Start Small

It’s easy to think you need a certain amount of money before you can start investing. However, that’s not the case. You can start investing with very little money. In fact, you can become an investor today with just a few dollars.

Public.com, Webull, Moomoo, and Fundrise are all excellent options for new investors. Even if you’re only investing a small amount, you’ll start learning and progressing toward your goals.

Understand Your Investing Goals

Before you start investing, you must have a clear understanding of your goals. Do you want to save for retirement? Are you looking for income? Are you working toward some other goal?

Your goals will shape your entire investing strategy, so it’s important to understand what you’re trying to achieve. Without clear goals, making informed decisions about your investments is difficult.

There’s no right or wrong answer regarding your investment goals. It’s entirely up to you what you want to achieve.

Understand Your Tolerance for Risk

Investing involves risk, and it’s important to understand your risk tolerance before you become an investor. Risk refers to the chance that you could lose money on your investment.

Generally speaking, investments with higher potential returns come with higher levels of risk. For example, stocks are riskier than bonds because they’re more likely to lose value.

On the other hand, investments with lower potential returns come with lower levels of risk. For example, bonds are considered less risky than stocks.

Your risk tolerance is personal and should be based on your goals and time frame. If you’re investing for retirement and have a long time horizon, you may be able to afford more risk. If the value of your investments goes down, you have more time to wait for it to go back up.

On the other hand, if you’re investing for a short-term goal, you may need to limit your risk to achieve your goal.

Investing Doesn’t Have to Be Complicated

If the idea of picking stocks or individual investments is overwhelming, consider taking a simple approach by investing in index funds or ETFs.

Index funds are mutual funds that track a specific market index, such as the S&P 500. ETFs are similar to index funds, but they trade like stocks.

Both of these options offer diversification and allow you to invest in a large number of investments at once. This can help reduce your risk and make investing simpler.

How to Become an Investor: Final Thoughts

Investing is a great way to reach your financial goals. It can help you build wealth, save for retirement, and even generate income.

Want to know how to become an investor? It starts with understanding your personal finance goals, risk tolerance, and options. Once you have a clear understanding of these things, you can begin taking steps to invest today.

Don’t be discouraged if you don’t have much money to start with. You can begin investing with just a few dollars. The most important thing is that you start learning and progressing toward your goals.

Disclosure: Information presented on Vital Dollar and through related email marketing is intended for informational purposes only and is not meant to be taken as financial advice. Please see our Disclosure for further information.