It’s easy to see the stock market’s appeal. Popular culture has made investing out to be a path to certain riches. But in reality, investing is a lot more work than it appears, especially if you hope to become a great investor and make big returns. You need a pound of hard work and good decisions just to get an ounce of success.
Most people new to investing don’t know even where to begin. And some are downright fearful, worrying about a downturn that always seems to be right around the corner. But bear markets can actually be an investor’s best friend, according to Mark Cortazzo, a senior partner at MACRO Consulting Group.
“Stocks are about the only thing that people don’t want to buy on sale,” Cortazzo said. “Back in 2009, when the environment was a lot less risky than today, people didn’t want to take risk. Now, when there’s much more risk in the market, people want to take on more risk. It’s counterintuitive.”
Following is a brief summary of how to start investing. It reveals both how to invest in the stock market with a broker and how to invest in stocks online. Learn these lessons, and you’ll soon overcome your fears and invest like a pro.
Make a choice: trader or investor?
Before getting started, decide whether you want to be a trader or an investor. To the average person, there might not be much difference between the two. In the money world, however, they are miles apart.
A trader is somebody who buys shares quickly and sells them even faster. Some traders might hold onto stocks and bonds for just a few minutes. The moment they see a profitable rise in value, they sell.
An investor is quite the opposite. Investors buy a stock and hold it for a long time in the hopes that the price will gradually rise over time.
Both approaches can be profitable, if you know how to do them right. The approach that is best for you depends on how much patience you have and how long you are willing to wait out market fluctuations.
Create an investing plan
Next up, create an investing plan. You do not need to craft a set-in-stone investing strategy, but you should have a general idea of what you are going to do. Will you invest in stocks or bonds? How about more exotic investments, such as futures?
How much money are you going to invest? How will you balance risk and reward?
Understand your long-term goals. Maybe you are investing to earn some money on the side. Or maybe you want to turn trading into your main career.
Whatever your goals, be sure of them and the plan to achieve them before investing a single penny.
Keep it simple
Remember, complicated does not necessarily mean profitable. It is better to buy just a handful of shares in a company you really understand than to buy 100 shares of a company that you think might be profitable. If you have $100,000 to invest, do not invest $1,000 in 100 different things. Instead, invest $10,000 in 10 different things.
Maintaining an incredibly diverse portfolio is not the key to good investing. Instead, aim for an incredibly simple portfolio that can still bring in returns.
Diversification of your portfolio is a good thing, but not knowing your portfolio is a bad thing. To be a successful investor, find a sweet spot between the two.
Develop a process
Discipline is a vital characteristic for any successful investor or trader. Using the same process over and over will give you that discipline.
It is important to weigh risk and return, and to come up with a process that reflects those realities. Know exactly how much of a net gain or loss in your stock will trigger you to sell. Also, know a precise price point at which you are willing to buy additional shares.
Do not rely on hunches or gambles, or trying to wait out a storm that will not end. Instead, create set values that determine when you buy or sell.
This doesn’t mean you should automatically jump ship if a promising stock goes down 7 cents. But if a stock value changes 25 percent, it might be a good time to take your winnings — or cut your losses — and go.
Do your research
Performing the proper research is one of the most important principles in investing. Such wisdom is true whether you heard of the stock market for the first time yesterday or you have been dealing stocks on Wall Street for 40 years.
Research is not a crystal ball and it doesn’t always tell you the best stocks to buy. But it might give you insights into what to watch out for with the stock.
For example, if a stock is prone to small leaps and dives, you will know not to panic and sell during a down week. If another stock historically does well or poorly during a specific time of year or under specific conditions within the company, you know to be wary when those circumstances arise.
As a whole, research might not necessarily save you from a bad investment. However, it might give you warning signs for when to buy, sell or hold the stock.
Practice before you invest
Just like anything else in life, you cannot expect to jump into the stock market and immediately do well. Before you start investing real money, practice investing online with virtual currency.
Doing this can reveal your strengths and weaknesses without damaging your wallet. Maybe you have a knack for milking investments to the maximum profit before selling. On the other hand, perhaps you are terrible with futures.
It is common to lose money in the early stages of your investing career. Online practice might help you avoid this fate.
Take it seriously
For a seasoned investor, stock trading can be enjoyable. Still, it is a mistake to view it as a hobby or something you do for fun. If you are in the market for fun, you are in the market for the wrong reasons.
Above all else, stock investing should be about making money. You do not need to spend all your free time researching and investing in stocks. You should, however, regard it as more of a part-time job than a hobby.
If you spend half an hour per night dealing with your portfolio, that half-hour should be regarded as business, not as a fun new experiment.
It is your money, and you can use it however you like. But if your stock money is going to be viewed as a hobby, be prepared to make very little in the way of returns.
The bottom line
You can either make or lose money in the investing game — at the end of the day, it comes down to how much work you are willing to put into it. You cannot get away from inherent investing risk, but there is a proper way to handle the investment process.
To get the returns of a pro:
» Treat investing like a pro.
» Do your research.
» Know what you are doing before you make an investment.
» View the process as more than just something to do in your free time.