As a beginner, investing in the stock market can seem somewhat daunting. But, in order to outperform fixed interest investments like CDs and bonds over the long-term, it’s important to have at least some portion of your overall portfolio invested in the stock market, specifically equities. This is especially the case if you want to meet or beat the rate of inflation, and to maintain future purchasing power over time.
While it is likely that you won’t start investing with $100,000, or maybe even $10,000, it is still essential that you follow some key tips as you start to invest early as a novice investor. By keeping these fundamentals in mind, you will be able to build a solid foundation for your stock investments. Here are some of the best stock market investing tips for beginners.
The Basics of Investing
Just as in any successful endeavor, starting with the basics of stock market investing can help you increase your chances of making money. While there are some investors who go to great lengths pouring over complicated charts and graphs, the truth is that abiding by just a few simple rules can go a long way in providing you with a solid return.
Prior to moving forward, you must evaluate yourself as an investor. For example, understanding your risk tolerance, investment style, and retirement goals can help you narrow down the best investments or stocks for you.
Your risk tolerance is your ability and willingness to withstand volatility in the value of your investments. This can be an important component of your overall investing, as it can help you in determining the types of companies you may or may not invest in.
For example, if you have a high risk tolerance, then you may be more willing to invest in smaller, growing companies that can be more risky, but may also provide more opportunity for price appreciation and gains. Conversely, if you have a low tolerance for risk, you will likely lean more towards larger established “blue chip stocks” or companies whose share prices do not typically move with as much volatility and are generally considered to be stable, long-term investments.
Your investment time horizon is another key factor in understanding the basics of your investing criteria. This is because the amount of time you are willing to hold an investment can affect the types of companies, stocks and investments you will invest in.
In some cases, an investor may have a goal of saving for a down payment on a home over the next five years. This will require a relatively safer type of investment to avoid sizable losses during a potential economic downturn. However, an investor may have a longer term goal to save and invest for retirement, allowing for investments that may require years to significantly appreciate in value.
Obviously, there are benefits of investing over time, which is why we recommend you start investing early.
Your overall financial, investment and retirement goals will also play a role in determining how you start investing in stocks. For instance, are you investing to preserve your wealth, or to grow your retirement nest egg? The preservation of wealth would require a higher allocation in bonds, Treasuries, CDs, and other low-risk, safe investments; meanwhile, the need to grow your wealth for retirement would mean diversification in equities, including mutual funds, ETFs and individual stocks.
Nevertheless, beginner investors must remember that, when looking at individual stocks and companies, you will need to know the basics of financial valuation and analysis to properly value a company. By determining the intrinsic value of a company’s shares, you will then be able to judge whether the stock is under or overvalued. Because this is a challenge, even for Wall Street professionals, we highly recommend novice investors who are just starting to invest do so via robo-advisors like Wealthfront and Betterment.
Control Your Emotions
It is important to keep your emotions in check when investing in the market. It can be easy to buy or sell out of greed or fear. But these emotions do not constitute sound financial reasons why a company’s shares may increase or decrease in value.
The most successful investors have a well-constructed financial plan, along with a disciplined process, and they typically only succeed when they stick to it and make their investment decisions based upon facts, figures, and researched estimates. For the average passive investor, the best way to invest your money is to allocate a majority of your portfolio to index funds, where the fees are low and the fund’s holding are managed by professionals.