Everyone is looking for a quick and easy way to riches and happiness. It seems to be human nature to constantly search for a hidden key or some bit of knowledge that suddenly leads to the end of the rainbow. Research has proven that investing regularly, avoiding unnecessary financial risk, and letting your money work for you over a period of years and decades is a certain way to amass significant assets. Below are some key stock market investing tips:
Set Long Term Goals – Before investing, you should know your purpose and the likely time in the future you may have need of the funds. If you are likely to need your investment returned within a few years, consider another investment; the stock market with its volatility provides no certainty that all of your capital will be available when you need it. By knowing how much capital you will need and the future point in time when you will need it, you can calculate how much you should invest and what kind of return on your investment will be needed to produce the desired result.
Understand Your Risk Tolerance – Risk tolerance is a psychological trait that is genetically based, but positively influenced by education, income, and wealth (as these increase, risk tolerance appears to increase slightly) and negatively by age (as one gets older, risk tolerance decreases). Your risk tolerance is how you feel about risk and the degree of anxiety you feel when risk is present. In psychological terms, risk tolerance is defined as “the extent to which a person chooses to risk experiencing a less favorable outcome in the pursuit of a more favorable outcome.” In other words, would you risk $100 to win $1,000? Or $1,000 to win $1,000? All humans vary in their risk tolerance, and there is no “right” balance.
Control Your Emotions – The biggest obstacle to stock market profits is an inability to control one’s emotions and make logical decisions. In the short-term, the prices of companies reflect the combined emotions of the entire investment community. When a majority of investors are worried about a company, its stock price is likely to decline; when a majority feel positive about the company’s future, its stock price tends to rise.
Handle Basics First – Before making your first investment, take the time to learn the basics about the stock market and the individual securities composing the market. There is an old adage: It is not a stock market, but a market of stocks.
Diversify Your Investments – The popular way to manage risk is to diversify your exposure. Prudent investors own stocks of different companies in different industries, sometimes in different countries, with the expectation that a single bad event will not affect all of their holdings or will otherwise affect them to different degrees.
Avoid Leverage – Leverage simply means the use of borrowed money to execute your stock market strategy. In a margin account, banks and brokerage firms can loan you money to buy stocks, usually 50% of the purchase value. Leverage is a tool, neither good nor bad. However, it is a tool best used after you gain experience and confidence in your decision-making abilities. Limit your risk when you are starting out to ensure you can profit over the long term.