Are you a first-time investor? These tips will show you how to approach the stock market!
Although the stock market may seem like a good place to multiply your money, entering the stock market without having a basic knowledge about the market can be a gamble, especially when it comes to first-time investors. It is a known fact that the stock market weather is highly unpredictable and if you enter the stock market with eyes closed, solely relying on luck, you’re nothing but a fool. No, understanding the stock market is not rocket science. As the renowned investor, Peter Lynch maintains that everyone can make sense of the stock market, “If you can make it through fifth-grade math, you can do it” – you just need to know when and where to strike to score the game point.
If you’ve been wanting to get into the stock market game for a while now but aren’t sure of how to begin, here are some useful tips to help to break the ice (and maybe eventually make big bucks)!
1. Define Your Long-Term Goals
The stock market is all about achieving specific goals, be it buying a second home or be it for expanding your business. Entering the market with a clearly defined set of goals allows you to envision how much growth you need to accomplish to reach your end goal and where you should invest to achieve the same. Being aware of how much capital you’ll need and at what point in the future you may need it will help you figure out how much you need to invest now. Before you put even a single dollar in the stock market, ask yourself one question:
“Why am I investing, and what do I want to achieve?”
Let’s say that in ten years’ time you wish to save $150,000. Now when you keep that goal in mind, you’ll know how much money you need to invest monthly to achieve that goal. Also, you must keep the following three factors in minds as they determine the growth of your portfolio:
- The amount of capital you are investing,
- The amount of net annual earnings on the capital, and,
- The investment period.
2. Understand Your Risk Tolerance Factor
When getting into the stock market, you must carefully assess and understand your risk tolerance abilities. In simple terms, risk tolerance refers to one’s ability to bear risks to a certain degree and also the level of anxiety he/she feels in the face of a risky situation. This is essentially a psychological characteristic that although is rooted in one’s genetics can be positively influenced by education and wealth. Understanding your risk tolerance factor is important as it helps you avoid treading the areas that can hamper your sleep and keep you perpetually anxious.
If you are someone who tends to get anxious easily, you should consider investing in such shares/bonds that are less risky and more liquid. This is also highly commendable for beginners. As you gain more and more knowledge about the stock market, that is, what shares/bonds are best for you, which ones are more volatile, and so one, you might gradually shift to more riskier investments that promise a higher return.
3. Diversification Is The Key To Stability And Success
If you think you can become rich in no time by investing in a handful of stocks that are hot now, you couldn’t be more mistaken. The ideal way to create a stable long-term growth plan is to diversify your investments. Wise beginners always start by purchasing stocks of various companies spread across different parallels of the industry. By doing so, you can significantly minimize the possibility of loss. If a particular share/bond goes down, you’ll still have the assurance that your other investments are afloat. If you’re looking for something that’s highly liquid, transparent, and promises a significantly higher return than any other kind of investment, you should opt for equity investments.
4. Don’t Panic. Be Patient.
The one truth that you must accept about the stock market is that stocks, shares, and bonds are bound to move up and down. Thus, if ever there’s a little drop in the price of a particular share/bond, don’t panic and make a decision to sell it all away. Be patient and hold on to it. However, if you see there’s a massive drop in prices, let’s say, 15-20% within a day, only then you should consider selling. Constant buying and selling without deliberating on the consequences will only lower your returns in the long haul.
On a concluding note, don’t let your fears rule your better thinking while considering to invest in the stock market. If you follow these four golden rules and develop the virtue of patience, you are sure to increase your asset value in the long-term. Just make sure you choose your stocks and shares wisely and then watch the magic of compound interest work its charm for you!