When a retail investor (e.g. your buddy Dave, or neighbor Tom), puts money into the stock market, they’ll usually describe this as investing. What they’re often actually doing is donating or gambling with those funds. What’s the difference between these two and investing?
To truly be investing, you have to have a level of strategy in how you choose to allocate all your money into any given opportunities (including the stock market). Investing requires some understanding of balancing risk/reward and having a thoroughly thought out ‘why’ to how your allocating your money.
Are you investing for the long term, trying to minimize fees? Allocating across equities (domestic & foreign), and bonds and cash? Using the Dividend-Discount Valuation Model to find stocks that may be “undervalued”? The strategy you use is up to you and dependent upon your situation, but there must be some thought out strategy make it investing.
The first step to truly begin investing, is to recognize what it means to invest. For many, the 2nd step is getting help, possibly from a registered investment adviser.
Part 3: Buying stocks is like investing…