The stock market is not only an aggregation of sellers and buyers but risks as well, due to volatility. If you understand how it works, you will have bigger chances of outplaying the risks making a profit, and consequently growing your wealth.
This article deals with some useful tips for beginners. Considering them is a must when investing in the stock market.
1. Invest in what you understand
Going for an investment in a business where you don’t even know the number of logistics involved, let alone analyzing them for predictions and estimations, will cost you at two places:
- You’ll be investing blind-folded. How can you analyze the balance sheet of a business you know nothing about? For example, Bear Stearns for beginners.
- This will confer you with the least wisdom and experience, even if you make bucks with your first investment. Say, after six months, you are ready for your next investment, you’ll be standing at the same place as you were six months before. You have gained the least understanding of the process.
For a beginner, a straightforward business is a way to go. A company or a corporation about which you can easily understand what it sells, and how far can it go. Tesla, Apple, and Chipotle are perfect examples of straightforward businesses that can make your investment decisions much easier for you.
2. It’s All Relative!
Compare the performance of your stock with how the market is doing in general. Let’s say, your stock goes 10 % up. Is this good news?
You don’t know. Until and unless you get to know how the market is going. If the market is going up by 5 % that year, you have done a phenomenal job. This IS good news.
And if the market goes up by 20 % and your stock is going up by 10 %, your stock is not performing well.
Make your decisions based on relative data, and not mere absolute stats.
3. Don’t sell your stocks for money needs
Your stocks and investments are meant to play long-term. You have money needs. And for that, you need an emergency fund. Your stocks should not be getting liquidated from time to time. It should be a dedicated value.
Set some money aside till you achieve your goals with the stocks.
4. Pink-sheet listed companies are a no!
For beginners, making an investment with companies and businesses that are not listed on national stock exchanges, New York Stock Exchange (NYSE) or the Nasdaq is not a good idea. These companies are called pink-sheet listed companies, and they work via private trading groups such as the OTC Market group (Over the counter trading system).
Also known as penny stocks, they may seem attractive in the beginning since they are low-priced. They sure are advantageous with their tier system and many other aspects, but only for extremely experienced people.
With pink-sheet listed companies,
- You never know whether your investment is potential or not. Because there is no obligation for the pink-sheet listed businesses to share their financial statements and annual reports.
- Thin trading. You made a fortune in penny stocks, but you will never be able to sell them without lowering the prices.
5. Piecemeal Approach
Stock markets have their highs and lows. So, instead of taking a huge amount in at once, invest chunk by chunk. Sometimes, the market will be at its lowest and sometimes highest. This will save you the risk of investing when market shares are at their highest.
Expand your investments over time. Go piece by piece.
The basic rule of investment: Don’t put all your eggs in one basket.
Spread out your investments. No matter how safe you think it is, the business may suffer a swing anytime.
With multiple investments, you get the edge of different businesses reacting differently to the same event in the market, such as a minor or a major crisis. Go for a more diversified and stable portfolio.
7. Plan an exit Strategy
Say, your stocks are going high and high. You should know where to sell and exit. Because no matter what, they are not going to be there forever. They WILL drop.
Achieve your targets. Sell them. And exit.