Welcome to the world of investing and investments! A few quick basics about investing, and we will be all set to go. This article covers these basics for you.

BASICS #1:

Investing is inherently risky. Money invested in any asset has a risk associated with it. There is no government insurance protecting that asset or your money. This means that your money can actually drop to a value of $0.00. The risk is real, and do not let anyone persuade you otherwise.

Having said that, there are ways to protect yourself on the downside - both in terms of choosing the right assets to buy, and by placing stop-loss orders (which will let you get out of an asset if its price falls to a certain point) to limit your losses. And there are more advanced techniques, such as hedging (buying a second asset that moves in price in an opposite direction to your primary asset) which can also help limit your losses (but will also limit your upside potential).

In other words, you must first realize that you can lose all your money and more (yes, end up owing money!) in investing. There are ways by which you can limit your losses, which are not perfect and will work in a number of cases. Diversifying your portfolio can additionally help lower the risk profile of your portfolio of investments.

BASICS # 2: Divide your investment capital into Anchor Capital and Active Capital (sometimes called defensive and attack capital). Your Anchor capital should be used in more conservative investments, while you can use your Active capital for more speculative positions. You should adjust your percentages according to your taste for risk. Generally speaking, your retirement money and college savings are anchor capital areas; excess money available beyond this capital may be used for your active capital. You can try and pursue higher risk/reward investments using the Active capital.

BASICS #3: You are called in the investment world as a Retail investor. In other words, similar to the world of clothing, automobiles and so forth, you are the end buyer, the last in the chain of suppliers and buyers. So just as in other industries, you will be paying top dollar for every investment that you purchase. Simply accept it and be aware of that. Hence, frequent trading of investments is not in your interest - you will always be paying the top dollar while buying and getting the lowest price while selling (similar to what happens when you buy an automobile or try to sell an automobile).

BASICS #4: A wide array of investment choices are available to the average Retail Investor, i.e. you.

• Stocks
• Bonds
• REITS
• Precious Metals
• Options
• Futures
• Real Estate

Of these, the most common areas in which you should be investing are

• Stocks
• Bonds
• REITS
• Real Estate
• Precious Metals

It is best to not jump into Futures & Options until later in your investment life

BASICS #5: Mutual funds are an excellent vehicle for buying investments such as stocks, bonds and precious metals with small amounts of money. They also get you expert management working on your side and because your money is combined with money from other individuals like you, it lets your manager purchase a large number of stocks, bonds or other investments to reduce the risk profile for the mutual fund as a whole. However, picking a mutual fund is as complex an undertaking as picking any individual investment, and must be done with care. And similar to when buying an individual investment, you have to keep up with the fund's performance and its management's philosophy.

BASICS #6: Your primary goal with any investment is TO NOT LOSE YOUR CAPITAL. This may seem obvious to you, but in pursuit of profits, there is a tendency to consistently increase the amount of risk in your portfolio, which is inevitably followed by losing money on your investments. Losing your capital is different from handling fluctuations in your portfolio. You have lost capital when the fundamental reasons for your purchase of an investment have changed and the investment has lost value in the process. Since the fundamental reasons have changed, you must completely reevaluate the investment objectively, and unless you can honestly say that you will still purchase the investment under these new conditions, it is best to cut your losses and sell out of that investment.

BASICS #7: Your secondary goal with your investments is to seek a return on your capital, either through income, dividends or appreciation of the value of the investment. A number of factors have to come together correctly for you to pick an investment that does not lose value and generates income/dividend for you. It is an even bigger challenge to purchase investments that will appreciate in value, and tend be riskier in nature. Following specific guidelines, tailored to your investment psychology, you can however find success in achieving this secondary goal with your investments.

BASICS #8: You do not have to make money with every investment. You simply need to be successful about half the time, and have the discipline to cut your losers and let your winners run. In some situations, it may not be easy to cut your losing investments (for example when buying a piece of property that is not working out). Those investments should be selected with greater care for they are more illiquid (tradeable) than other forms of investments; and yet the basic truth remains  cut your losers, and let your winners run.