Is the stock market such a treacherous place? It’s easy for an investor (such as myself) to say that it isn’t so scary. Those who don’t know much about investing will often seek advice and encouragement from an investor before taking the plunge themselves.

How often do you have a conversation with a friend that sounds something like this:

Hey, I want to invest. What do I have to do?
How much do you want to invest with?
Like $500.
Okay. That’s not much but enough for you to start.
Which stock should I buy?
…

Where does one get the idea that someone who has money in the market knows what stock to buy? I want to be a good friend and just list a few ticker symbols that I believe would see a rise in stock price. But, I’m not an expert stock picker. I don’t trust the advice of most professional stockbrokers so why would anyone trust me? And most important of all, I do not want to be the center of blame because of a poor stock tip.

They Want a Little Taste First
Many prospective investors do not jump into the stock market without a little push. Think of the first time you put money in an investment account and bought a stock. The majority of investors would profess:

• “I started investing with less than $1,000.”
• “I had guidance from someone who was an investor.”
• “I asked that person what stock I should buy.”
• *Bonus – “I lost money on my first stock purchase.”

Their reluctance to pour their savings into investments is mostly due to inexperience and absence of knowledge when it comes to investing. Usually, we never truly learn anything about a situation until we are in the midst of it. A person who has never declared bankruptcy knows much less regarding the subject than the person who has gone through Chapter 13 bankruptcy.

With less than $1,000, it offers a glimpse into the stock market and the world of investing.

Entry Into Investing is Most Important, Not How Much
I always say that $500 is too little to invest with. A lovely 10% gain would only mean a profit of $50. If the starting amount was $5,000, the profit would be a whopping $500.

It is self-contradictory of me to say so because I started with $500 myself. If I think back to when I first started, I didn’t really care about how much I would gain – though I certainly prayed for a 1000% profit. The most memorable experience was completing the buy order.

Becoming comfortable with investing is primary objective for these aspiring investors. I never thought I’d open up a Roth IRA and buying mutual funds and ETFs – but I am now. Since investing is a necessary aspect of building wealth, developing the habit of investing would be beneficial to those seeking to create a solid retirement portfolio.

My Universal Response to Aspiring Investors
Don’t be afraid to start investing – no matter how little you have to invest with. It is a very simple process from turning a small balance in your checking account into a few shares of a growing company. Here is my 30-second recommendation for rookie investors:

1. Open an account at an online discount brokerage. You want to avoid expensive commission fees from full service brokerages. Popular discount brokerages include Zecco and Scottrade.
2. Fund the account with any amount you are comfortable with. There is no perfect amount to start investing with. Keep in mind that there is a chance of losing all your money – so put in what you can afford to lose.
3. Buy shares of an index ETF. Don’t ask anyone for a stock tip just yet. Index ETFs are shares in a fund that invests in a wide range of companies. The idea in buying ETFs instead of stocks is to help the investor get used to the ups and downs of the stock market.

Do you have these similar conversations? If you can relate to this article, share what type of advice you give to your fellow friends. And if you are the prospective investor, were your friends of any help?

(Photo credit: Marco Belluci)

Peer-to-peer loans have become the next biggest thing in investing. The stock market may be producing disappointing results but the new social trend in lending is proving to be a nice alternative – and a great way to diversify one’s investment portfolio.

Lending Club, the most popular peer-to-peer lending network today, is one such company where average Joe’s like you and I can lend to people and collect interest. So, we are the ones making a profit – not the corporations we call banks.

You get to review a large number of loan requests. Information that is available for you to review includes a job profile, home ownership, credit history, and delinquency history.

You Are Not a Savior
Now, it is commendable to want to invest in a loan for someone who is struggling to pay their basic living expenses but needs a loan to pay medical bills. Regretfully, I have to say that it is terrible loan to invest in. Your only goal when it comes to peer-to-peer lending is to gain a profit – a goal that aligns with that of banks.

Though the increased sense of pride is a desirable perk for helping someone out, you won’t be feeling so honorable when the borrower begins defaulting on a loan that you funded. A loan gone bad will leave you feeling cheated with a frown on your face as you watch your money disappear. Don’t ever deviate from your role as an investor. You are not a savior.

Think Like a Bank
Banks are greedy and their money means everything to them. No wonder they are able to make billions of dollars a year. When you have invested in a peer-to-peer loan, you act as the bank. It is your money at risk. Assuming the same attitude that banks use would help replicate their results.

• Define a lending criteria.
  There are hundreds of peer-to-peer loans that are waiting to be funded as there are also thousands of mortgage applications waiting to be reviewed. So, you must weed out loan candidates that do not fit your taste. Banks will immediately turn down anyone with bankruptcies. What are some details of a loan or a borrower that you’d immediately reject?
• Seek a strong ability to repay.
  The moneymaker of loans is interest. Loans are a long-term commitment and the longer a loan, the more interest you collect. Therefore, you need to find someone who is stable and consistent with making payments. A person who has low job security or tight cash flow after expenses is an unattractive borrower because their unreliable ability to repay the loan. Many lenders on Lending Club inquire on a borrower’s job position, length of employment, and monthly expenses. A steady job with good positive net income after expenses is ideal.
• Shun all emotion.
  The more intimate relationship between lender and borrowing creates an increased tendency to sympathize for others. Such glimpses of human emotion are absent with the procedures that banks take when lending. It’s not just you who feels sorry for the single mother raising three children with a low-income job who needs a loan for medical treatment – everyone feels sorry too. But, you are putting your money at risk. If you lent to this struggling mom, you may well be giving money – not lending.
• Ask questions and analyze the information.
  Peer-to-peer loans are more personal that the loans handed out by banks. That’s a reason to get to know more about the borrower. A good amount of information would better assist you with deciding whether or not you should lend to loan candidates. Discovering a discrepancy in their information may help you dodge a bullet. Things like a divorce, kids going to college, or the lack of health insurance could be hints of impending increases of financial burden which could jeopardize their loan repayments.

Is thinking like a bank a foolproof way to invest in peer-to-peer loans? While it is obvious that defaults do occur (just look at how bad mortgages took down our economy), such a strategy is an imperative approach when it comes to investing – not just peer-to-peer loans.

I don’t know what came over me but I’ve been pumping out eHow articles for the past two weeks. Any ideas that I don’t see fit for Realm of Prosperity will somehow turn into a how-to article – and I’ve seen the rewards from doing so. Although it is just a few bucks here and there, I do see myself building a portfolio of about 100 eHow articles by this summer.

As of now I only have 20 articles earning about $6 per month ever since starting to use eHow last summer. Still a rookie here but my recent drive to write more for them will hopefully increase the number of articles and my earnings.

On to some interesting reads published recently:

• The Best Times to Buy Anything, All Year Round at LifeHacker. The best time to get a good price on something is when no one else wants to buy it – just like stocks. LifeHacker breaks down the categories of stuff and the times during the year when you can get the lowest prices. Great to know for all shoppers.
• Five Psychological Money Tricks That Work at Bargaineering. I’ve always believed that good money management doesn’t start with your finances but with your mindset. Often, we can’t control how we think but we can trick ourselves into doing things – a powerful way to handle money.
• No One Became Wealthy Worrying for Others at MoneyNing. This article is putting in our faces. Stop comparing what you have to what other people have and focus on what you can get. You are you and that’s the only person that should be concerned about.

Carnivals that Realm of Prosperity participated in:

• Carnival of Personal Finance – Support Haiti Edition at Million Dollar Journey

Making your first stock purchase may be a big step and new experience to a young investor – it certainly was for me. We’ve heard of the tragedies where people lost their entire retirement savings and we’ve heard of the fortunes of those who picked a winning stock.

But, of course we are hoping that we end up selecting the one company that will allow us to afford fancy luxury cars and feed all our friends in college. The dream is common among most new investors and such a rush can develop into an addiction to investing.

Many would say “I’m not addicted to investing. I just don’t want to lose all my money.” Well, from my experience, it wasn’t really about my fear of seeing a loss. My relentless string of refreshes of the Yahoo! Finance page was fueling my anticipation of see a green percentage next to my stock quote. After all, the ideal happy ending is a positive return on investment.

Here are some signs that you may be addicted to investing:

1. You check stock quotes every five minutes.
   In fact, you probably check the stock quotes in 30 second intervals right after you make your trade. You want to see how much the stock price went up. You yearn for a spike on the stock chart. Sadly, clicking the refresh button repeatedly has no effect on the performance of your stock.
2. You check your investment account balance every five minutes.
   You are not satisfied with punching ticker symbol after ticker symbol. Sure, the stock quote shows that your stock went up 5% but that doesn’t show your gain in real dollars – so you log onto your brokerage account at Scottrade every five minutes as well. You don’t really care how much your balance is because all you want is for that number to go up.
3. You invest every penny you have.
   Why save your money in an ING Direct account at a measly 1.50% APY when you can earn so much more on the stock market. You pour your paycheck into stocks because you know that the power of compounding dictates that more money can make MORE money.
4. You borrow and accumulate debt to invest.
   After using your funds to pay for rent and to buy more stocks, you live off your credit card for everything else. Wait. That isn’t enough for you. You open a margin account, take out 0% APR balance transfers, and borrow from your parents and friends.
5. You pay too much in commissions.
   Commissions are a crucial expense to any trader. So what? Maybe you are an aspiring daytrader – one that can stay at home and make thousands of dollars with a few clicks of the mouse. For some, it is very much like impulse shopping – to buy stuff for the sake of “buying”. Soon, the commission fees rack up and eat away at your returns.

It Isn’t Necessarily a Bad Thing
Addiction to investing certainly isn’t a bad thing. In fact, I’m guilty of exhibiting a few signs noted above (to a small degree). Such drive and risk-taking has led to big fortunes for young adults and have also ruined the financial futures of many others.

I’ve learned from looking back at my attitude towards investing that it is essential to building wealth but it is important not to be drowned in the moment. Investing in the stock market – the big pot of gold that it is – is a long term endeavor.

Have you come to the realization that you were somewhat addicted to investing?

(Photo credit: luisvilla)