Just the thought of trading stocks can instill fear and trepidation into most people. While trading in stocks can be a rewarding venture, there is still a lot of risk involved. This risk is multiplied for people who are ill-informed about how the stock market works. Understandably, stock trading is a world that for many seems complicated and impenetrable. When asked about the possibility of entering the stock market, most people will decline, saying that they don’t know enough about it. Many people would instead prefer to go the safe route and keep their money in savings. While the world of stock trading does seem at times to be foreign to most people, the reality is that you can learn a few tricks of the trade in order to help you feel more comfortable. So what are a few of these investing tips that can help you along as you try to negotiate the ups and downs of the stock market?
Risk only what you can afford to
Only invest the money you can afford to lose. This is perhaps the most important rule in all of investing. If you stick to this rule, the chances of you becoming homeless and eating scraps are greatly reduced. There is a human tendency to go all out on your first try. Avoid falling for this compulsion. Don’t fall for the temptation to sell all of your assets and invest all of your money into the stock market. Getting a return on your investment is not guaranteed and you could be setting yourself up for massive failure. Instead, invest only your surplus money i.e. the money which you can risk losing. The idea is that even if your investments were to fail, you can still live as comfortably as you had before.
Have a clear goal in mind
If you are going to begin investing in stocks it’s important to have a clear vision in mind of what you want to accomplish. Saying that you want to get rich is simply not enough. Your goal will help determine your investment strategy. Whether your goal is to save for retirement, buy a house or send your children to college, your goal will help you decide how risky your investing needs to be.
Don’t try to outwit the stock market
Too many people get into the stock market with a day trader mentality, timing the market and waiting for their stocks to appreciate in value before abruptly selling them off. Stocks values are bound to fluctuate, but it is important that investors do not become fixated on short term fluctuations. Remember that you are in it for the long haul. Even if a stock has decreased in value, it does not mean that the value will remain depressed. It’s also important to remember that you only lose money when you sell the stock. Resist the urge to sell your stock as soon as prices start falling. That is an amateur mistake. Instead, formulate a plan for your stocks and stick with it.
Test it out with paper trading
If diving headfirst into stock trading is still a little scary to you, you might want to first try your hand at paper trading. Paper trading is virtual trading using a stock market simulator. Instead of putting up real money, you use virtual dollars to trade stocks. With paper trading there is no risk to the user. It allows you to observe how the market operates while giving you the opportunity to tweak your own trading strategy. The good thing is that you have ample room to make the mistakes you are bound to make. However, you also have the opportunity to correct those mistakes and build your self-confidence.
Diversify your portfolio
Investing in stocks is about managing risks, but part of that risk can be mitigated by holding a diversified portfolio. One cannot hold onto meager 2 or 3 stocks with the hopes of it performing well. Were the prices of those stocks to plummet, it could mean a very big loss to you. One way to diversify stocks is to purchase stock from companies in different industries. This way, if one industry were to be faced with hardships, your better-performing investments will help your portfolio to stay afloat.
Consider Exchange-Traded Funds (ETF)
As an individual with responsibilities, you may not have enough time to choose individual stocks. Many experts recommend that new adoptees look into Exchange-Traded Funds (ETF) as an option. ETFs are often traded commission free and seek to provide the investor with a suitable return for a minimal cost. ETFs track an index, a commodity, bonds or a number of assets combined into one fun and they trade like a common stock.
Do your homework
Remember that when buying a small part of a company, You purchase is actually a vote of confidence in how well you think that company will perform in the coming months or years. How well that company does will determine how well the stock performs. To make good decisions on purchases it is imperative that you first do your homework. Potential investors must look at a company’s history and growth potential. Try to identify those qualities that will help your chosen company grow in the not too distant future.
Investing in stocks is not an easy task. Before placing your first order you have to navigate a whole new world filled with new terminologies, insecurity and many unknowns. However, the upside of stock investing is clear. It could mean a better security net for you, your children and your grandchildren. The key is to learn as much as possible. Don’t get to a point where you begin to think there is no more you need to learn. This is your hard earned cash, after all. Learning how to properly invest and avoid unnecessary risks will pay dividends in the long run.
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