5 Stock Market Investment Tips Every Beginner Should Know
Investing in the stock money market is an excellent way to accumulate wealth over the long term. Thanks to technology and the internet, investing in stocks today is more accessible than ever. However, the stock market may not be very easy for beginners. Below are tips to get you started.
Know your Investment Goals and Timeline
Your investment goals will influence your investment strategy. If your target is to reserve your capital and make some income from it, you may invest in a more conservative portfolio, eyeing less-risky companies or investing in bonds. If you want to invest in the long term (for example, to build retirement savings), your best option is to focus on stocks that offer higher return potentials.
If you are a young professional focusing on retirement savings, you can handle the volatility associated with investing in high-risk yet high-reward stocks. If you have a short-term goal (saving for a teenager’s college), you may want to build a less volatile portfolio. You may want to focus on bonds or blue-chip stocks instead of investing in small and risky companies.
Understand How to Buy Stocks
You can buy stocks using a brokerage account or a Robo-advisor account. Both options allow you to buy, sell and maintain your purchased stock in your computer, but they vary in fees and available resources.
- Brokerage account
An online brokerage account offers you a quick and less expensive way of buying stocks and other investments. The service allows you to open an individual retirement account (IRA) or a taxable brokerage account if you save for retirement in your employer’s 401(k) or another plan.
- Robo-advisor account
A Robo-advisor account allows you to invest in stocks but does all the work required to pick individual investments; it does all the investment management for you. The Robo-account services will need you to fill in your investment goals when you open an account and then create a customized portfolio to achieve your targets. The Robo-accounts are cheaper than a human investment manager, and they also allow you to create an IRA account.
Know When to Sell Stocks
New investors often focus more on which stocks to buy and tend to ignore the other equally important aspect of when to sell. While this is a big mistake, you can avoid it by having a sound set of sell rules. Without sell rules, you can lose your gains or, worse, take a larger-than-necessary loss. There are two types of sell rules.
- The offensive rule for locking in your profits
- Defensive rules for minimizing losses
The key to making, retaining, and accumulating your stock market profits is to learn to use both types of sell rules.
Know Your Investment Risk Tolerance
Risk tolerance defines how much risk you are willing to take or can handle emotionally as an investor. If you have limited finances, you have a low-risk tolerance. Other considerations that help determine risk tolerance include:
- How much time you have for your investment to grow
- Your current and future forecasted expenses
- How much you expect your income to grow
- Your health status.
If you earn a big salary and have many years before retirement, you have a high-risk tolerance. On the other hand, if you are living paycheck to paycheck, you have a low-risk tolerance. You may be willing to invest for the long term and increase your portfolio’s value over time, but your risk tolerance may lead to investing in less risky stocks.
Handle Basic Finances
Before investing in stock, you should sort out or plan for your daily finances. This may mean building an emergency fund and clearing high-interest debt. Experts recommend having an emergency fund that amounts to anywhere between three and six months of your expenses. The amount is usually enough to cover unexpected costs or see you through a period of reduced income like unemployment.
When you have an emergency fund, you will not have to sell off your investments to cover your living expenses. Clearing high-interest loans is equally essential. You do not want a loan whose interest rate equals or exceeds the profits from your stock investments.