So, you want to invest in the stock market. That’s great!
That means you’re one step closer to significantly growing your money over the years.
But it also means that you’re one step closer to making mistakes that will cost you over the long-term; if you’re not ready, that is.
A determination to grow your money alone won’t cut it. You also need to learn how to do it in a way that protects you from rookie mistakes.
So here are some of the best stock market tips for beginners to help you understand what you need to watch out for and better direct you through your investment journey…
1. Don’t Invest More than you can Afford to Lose
Investing in the stock market has risks, no matter how conservative you are. The risk of losing all of your invested capital, although very low, is still there.
You should only allocate the portion of your wealth that if you lose it, it won’t affect your capacity to pay off debt and face emergencies. Investing is about trying to grow money that you save after you take care of your obligations, not before.
Before you even think about investing, you should first make sure that you are capable of paying any interest on debt, not only basic necessities.
At the same time, you should have built an emergency fund before you go ahead and invest in the stock market.
If you take care of those things first, you will automatically be investing money that you can afford to lose.
2. Invest in an Index Fund First
Here’s the deal. Understanding how the stock market works, learning how to analyze stocks, and building your own investment model will take time.
Until then, you will have to park your money somewhere because inflation pushes down your money’s value every year. You certainly can’t afford to not invest as soon as possible.
The most practical solution here is to invest in an index fund until you are ready to pick stocks. Hands down, this is one of the most important stock market tips for beginners (especially with those who have a large fund available to invest).
An index fund is basically pooled money that professionals manage. The difference from regular mutual funds is that the portfolio managers will try to mirror the performance of a certain index.
If you select an index fund that follows the performance of the S&P 500 index for example (an index that includes the 500 largest US companies that best represent the broad market), you will almost do as good as the market in good times and not too much worse than it in bad times.
An index fund that follows a broad market index is ideal for those who want to invest immediately, but don’t want to take the risk that comes with stock picking.
If you want more details about selecting an index fund, you can take a look at this guide.
3. Stay Away from Risky Strategies
When you’re ready to invest in individual stocks, try to stay away from risky strategies for some time.
For example, most brokerage firms offer you the ability to trade stocks on margin (or “using leverage” as others call it). This is a risky way to invest in stocks because you basically borrow money to trade.
It can offer great returns if the bought stocks’ prices rise but it can do great financial damage if they fall. This is more speculation than it is investing and it’s generally not recommended for beginners.
Another risky strategy is selling stocks short (short selling). Short selling helps you profit from falling stock prices. It is the practice of borrowing stocks from your broker and immediately selling them in the open market. If the stock’s price falls then you can buy the stocks at the lower price, return them to your broker, and pocket the difference.
Despite how attractive this may seem when you believe that a certain stock’s price will fall in the future, it can be very dangerous if it turns out that you’re wrong. This is because the price of the stock can only move down all the way to zero but it theoretically can increase to infinite levels.
If you have to buy a stock at a much higher price later, then you will actually lose money. Too much risk for a small reward. Stay away if you’re not absolutely sure of your forecast.
4. Don’t put your Eggs in One Basket
When you first start buying stocks, you will not be very confident. That’s OK. Nobody is in the beginning.
One great way to boost your confidence and lower the risk is by diversifying.
Diversification is a fancy word for the practice of either buying stocks from different industries or buying a mixture of both stocks and other securities like bonds. In other words, it is about spreading your eggs around…
Though it’s perfectly acceptable for novices to have an only-stocks portfolio, it’s risky to have only 3 or 5 stocks in it. The bad performance of one stock can significantly affect your overall performance in that case.
And while it’s true that the spectacular performance of one stock will not increase the value of your portfolio much when you hold a lot of stocks, it’s a price that you will have to be willing to pay as a beginner.
Consider including at least 20 stocks in your portfolio when you start and then get more concentrated as you become more experienced.
5. Focus on the Long-Term
Your worst enemy when you first start investing will be impatience. Buying and selling stocks in the short-term doesn’t work well for most investors.
Instead, focus on the long-term prospect when investing in the stock market. Try to not make big and frequent changes in your portfolio. Think well before you buy a stock by simply promising to yourself that you will have to keep it for at least one year.
Most successful investors have been long-term ones. Moving in and out of stock positions in a short period of time isn’t their preferred strategy. Just try to be sure of your forecast and patient in order to realize long-term gains.
6. Regulate your Emotions
Here’s the hard truth: you will not always be confident when it comes to the decisions you make. And this is usually the case when you see your portfolio not performing very well or when the market experiences a financial crisis (which results in your portfolio not performing well).
But it’s important that you do not make decisions based on your emotions. Seeing a bought stock’s price drastically go down can be scary, but selling it based on the fear that it can go further down and never recover is both irrational and unprofitable.
This also applies to rising prices. You should not buy a stock just because there’s too much hype about it or it keeps rising in price.
Stock prices go up and down all the time. If you thoroughly analyze every stock you buy, you will have nothing to worry about. Regulate your emotions and only make buying and selling decisions based on your analyses.
Conclusion
Investing isn’t easy and you will face many difficulties during your journey.
But if you keep these 6 stock market tips for beginners in mind, you will be better prepared for any of them.
The most important things you should remember when starting are to invest for the long-term, not take too much risk, and keep a cool head when you make any decision.
Thank you for reading and if you have any questions, leave a comment down below.
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Take care and invest wisely…
Disclaimer: This information should not be viewed as financial advice. You should consult a financial advisor or do your own due diligence before you invest. The owner of this website and author of this article are not to be held liable for any undesired result by anyone who uses this information that is provided here in any way.
