Financial Tip Friday: 5 Investment Rules Every Beginner Needs to Follow

There's no denying that investing in stocks, bonds, ETFs, and mutual funds is a risk, especially when you're just getting started and have limited knowledge of how the market works. As with any investment, you have to be prepared to lose money, as there's no guarantee that you'll see a return. Keeping this in mind, you should only think about investing if you have the money to lose. Don't part with money you rely on to pay your bills or live off of day to day. In this article, let's take a look at five investment rules every beginner needs to follow when getting started. #1: Do Your Homework Don't invest in a company just because you like its product. There's no guarantee that it'll make money in either the short term or the long run. Ensure you do your homework about any company you're considering investing in. This means looking at balance sheets and the fundamentals of the company, including current price, profits, and management. With some investments, you have to be willing to hold on for the long term and not expect short-term returns. This could mean holding a position for 10 years. While not all investments work this way, you have to be prepared to stick it out for the long haul. Consider the company's earnings, sales, debt, and equity. All numbers should be higher then they were the company's previous fiscal year, expect for debt. You should be looking for companies that are paying down their debt and lower then their assets. #2: Don't Leave Anything Out Looking at a company's balance sheet is not enough. Be prepared to examine the annual report, 10K and 10Q reports filed with the SEC, Value Line Investment Survey, Standard & Poor's Stock Reports, articles in the Wall Street Journal and Investor's Business Daily, and other reputable stock investment websites. Look at what other finance experts are doing and how it compares to your plan. For example, check out Gary Crittenden on Crunchbase, follow Ali Boone on Twitter and Jim Breyer on Forbes before investing anything on your own. You can even look into social investing with SprinkleBit, where you can connect with individual investors to follow their moves and track their overall return on investment. Look at the price-to-earnings ratio, price-to-sales ratio, return on equity, earnings growth, and debt-to-asset ratio. If you're unsure what these terms mean, do some research or ask for the help of a more experienced investor. A simple Internet search for how to invest in stocks should get you pointed in the right direction. #3: Don't Be Afraid to Ask for Help If you really know nothing about the market and you're unsure of where to start, don't just blindly start investing money while crossing your fingers and hoping for a return. This is a surefire way to lose money. Don't be afraid to ask for help from a knowledgeable investment manager.   #4 Diversify Your Portfolio When you've decided where you're going to invest, ensure that you don't put everything you own into one company. To limit risks, you should consider diversifying your portfolio and investing in more than one company and even sector. If one of your investments does poorly, at least you'll have diversified enough where you may be making money on another investment. Remember, the less of a risk you take, the less chance there is of a big reward. Consider investments like mutual funds, ETFs, and bonds that are safer and typically move more slowly than other types of investments. #5: Don't Just Think Stocks If you work full-time for an employer, chances are they offer some form of investment opportunity, such as a 401(k). Not only are contributions to 401(k)s tax free, but depending on your company, they may match what you contribute from each paycheck. Not only can you have a diversified portfolio to meet your needs, any employer-matching is basically free money to which you otherwise wouldn't have access. Think of a 401(k) as a long-term investment that you shouldn't expect to touch until retirement. Stay away from options until you're comfortable with the market and know exactly what you're doing. There's too much to lose if you jump in without knowing exactly how it works. There are several Internet resources that can help you learn, including Bloomberg, Forbes, MarketWatch, and Yahoo Finance. Spend a decent amount of time researching and learning the market before you invest a dime. You'll be less likely to lose money if you understand what you're doing and the risks involved with each type of investment vehicle. Did you enjoy this week's Financial Tip Friday? Check out last week's on cutting the cable! Brian Flax is a freelance writer based outside of the Washington, D.C., area. He is experienced in a variety of topics, including education, technology, and finance. Image courtesy of digitalart / FreeDigitalPhotos.net Image courtesy of ddpavumba / FreeDigitalPhotos.net