What Is Investing?
What is investing? It sounds like a simple question, but is it? Investing should be simple, but we have a way of complicating it.
Investing should be defined as anything you buy that makes you money. Simple, right?
Investing in stocks should NOT be confused with day trading. Investing in stocks is NOT about finding a hot stock tip.
If you are just starting out investing, you should consider companies that you plan to hold onto for at least one year. If you decide to sell after a year, at least you will be paying long term capital gains tax versus short term capital gains (less than one year) which is taxed at your ordinary income rate.
Stock Trading Is Not Investing
If you are starting out with $1000 to “play around with” you must remember that every trade (buying or selling) you do will cost you $9.99 (at e-trade brokerage). Essentially, that is 1%. So you buy $1000 worth of stock, it costs you 1%, and say it goes up and you sell; it costs you 1%. This stock needs to have gone up at least 2% to cover just your trades. In addition, you are paying ordinary income tax (say 18-23% as an estimate) on any gains on top of that.
This is where the investor joke, “They call them stock brokers because they make you broke off their stocks” comes from. Stock brokers encourage trades because they get a piece of the action like a bookie taking bets. The house always wins because they represent both sides, and also take a piece off the top.
To make money day trading, you need to be using a lot of capital. A lot of day traders use leverage (other people’s money) so that a small spread yields them a lot of profit. But also a small mistake can be VERY costly. People that make a living off of day trading can apply for a special IRS status so that they are not taxed on short term capital gains like you and I are. You need a lot of money, and to dedicate the majority of your time to qualify for this status. This is not investing. This is trading.
Investing is Necessary For Wealth
What you need to do is invest. Think of investing as your savings account, only better. When your money sits in your savings account, what happens to it? It gets eaten up. Sometimes slowly (inflation or a nice dinner) and sometimes rapidly (vacation or car repairs).
When your savings is tied up in investments, the psychological impact is great. Your brain considers the money spent. It is in another account, and is tied up in stocks. Worst case scenario, you can ALWAYS take it out if you NEEDED to. But you need to convince yourself never to do so.
It is no secret that I love real estate. I love everything about it. One interesting thing about real estate that not many people know, is that you can own real estate without owning a property.
REIT: Real Estate Investment Trust. (CLICK HERE FOR INFORMATION ABOUT REITS)
You may think that you don’t have enough money to invest yet, but you are wrong. It is all about establishing your plan, and then sticking to it. Everything I have read about real estate tells me that apartment buildings are wonderful investments. I would love to own an apartment building. But sadly, I am not in a position at this time to provide the funding to acquire one.
Instead, I found a company that owns apartment complexes throughout Southern California (very strong rental market) and is willing to sell me shares so that I can own a piece of it. In addition, this company is paying me money to own these shares. Why is that? If you don’t know then you didn’t click on the link that provides information about REITS.
Maybe you like commercial properties? Hotels? Retail? Medical? Residential? There are all kinds. Here is an alphabetical list.
The greatest thing about REITS is that you get all the benefits of owning real estate, without the hassle. I want to own an apartment still, but instead of throwing money into a savings account to save up for one, I am investing into an apartment REIT that pays me money to own it, plus will go up in value over time as inflation hits and the market recovers.
This will help me reach my goal FASTER. Investing shouldn’t be about: “I am saving up X amount of dollars, then I am going to invest in Y.”
Investing should be about: “I am going to invest in X now, and then eventually I am going to take that and invest in Y.”
Investing For You
There are investments for everyone. Depending on your age, income, risk tolerance, whatever. There is no reason to NOT invest other than being uneducated. But everyone has the ability to fix that.
I used to believe that I had to learn enough about a topic so that I could ask an “expert” a logical question. I later learned this was not enough. Instead I would urge you to know enough on a topic to ask a logical question, and also know whether or not the “expert” just gave you a bull shit answer.
To conclude, when it comes to investing always remember Warren Buffett’s two rules of investing.
1. Never lose money.
2. Don’t forget rule number one.