Most people don’t know much about the stock market. They’re not taught about the subject in high school and few make an attempt to learn how it works when they become adults. Most people are content to allow a broker or fund manager to make their financial decisions, even though this isn’t always the most advantageous choice.
More and more people today are opting to make their own financial decisions. This is an important choice, but it isn’t one to be entered into lightly by a newcomer to the market. The decision goes deeper than simply opening an online brokerage account. Anyone who simply decides to begin their own investing is likely to stumble, unless they have the proper training. The stock market isn’t difficult to understand, but those who simply blunder into the market are likely to have their accounts drained in a hurry.
It’s important to understand several points before taking the plunge.
Almost any investor understands the need to diversify. The phrase “don’t put all your eggs into one basket” is never truer than when discussing the stock market with a newbie. But diversification goes deeper than simply not having all your funds tied up in one stock. You must also diversify the sectors in which you invest. In other words, don’t put all your money in the same field; perhaps place some funds in energy stocks, others in tech stocks, and others in transportation. This will help prevent the collapse of your portfolio if one sector falls apart.
Don’t risk it all:
Never put your entire account at risk. Leave some money for cash or in short-term notes. You’ll be able to get to the money if you need it and one mistake won’t leave you scratching your head and wondering what happened.
Too many self-directed investors are looking for the quick score that’s going to double their account overnight. That isn’t likely to happen, so don’t go in with the wrong expectations. Be satisfied with slow, steady gains. Consider this: A 5 percent gain for one trade each month doesn’t sound very sexy, but done consistently over the course of a year, that equals a 60 percent return. No fund manager is likely to produce numbers like that.
Are you a risk taker or do you prefer the low-pulse approach? Just make sure your investments match your temperament. If you are a nervous trader, a highly volatile stock purchase will likely make you crazy. On the other hand, if you want action, you’ll probably be very frustrated by getting involved with a slow-moving stock. Follow the Bard’s instruction: To thine own self be true.
Once you’ve made the decision to get involved in the market, the first step should be to obtain as much education as possible. There are many sources of stock market education for beginners. You can learn about many of them by spending an hour searching on the internet. Many companies have sites that explain stock market basics and how a newcomer to the market can conduct the proper analysis. Some companies offer free classes for newbies, while others provide paid classes that are taught by instructors, either in a live class or through an online environment.
Matt Kaldor is a senior content writer with Better Trades, the nation’s No. 1 stock market education company.
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