Investing may seem daunting for those who have never dipped their toes in it. But once you get started with some basic understanding of the stock market, it becomes easier. Here are our top five tips on investing for beginners.
You know what makes the stock market so great? It’s that anyone can invest in it.
No matter where you live or how much money you have, the stock market is a great way to help grow your wealth. And it’s not just for the super rich—it’s also open to people who are starting out with smaller amounts of money. Plus, there are tons of different ways to invest, so no matter what kind of investor you are, there’s a place for you in the stock market!
Everyone knows that you can make a lot of money in the stock market if you know what you’re doing. However, most newcomers don’t understand how the market works.
Here’s what you need to know about the stock market before you begin investing.
What is the Stock Market?
Stocks, also known as equities, are securities that give shareholders an ownership interest in a public company. It’s a real stake in the business, and if you own all the shares of the business, you control how the business operates. The stock market refers to the collection of stocks that can be bought and sold by the general public on a variety of different exchanges.
The stock market is made up of thousands of companies that raise capital by selling their shares to investors. These investors may be individuals or institutional investors like banks, mutual funds or pension funds. The value of these shares depends on a number of factors including earnings per share (EPS), return on equity (ROE) and dividend yield among others.
Trading typically takes place on a stock exchange like the New York Stock Exchange or Nasdaq. Back in the day, trading used to take place in a physical location such as the stock floor. Now, almost all trading occurs virtually in the comfort of one’s home or office.
So what do you need to get started? First you must get a brokerage account, and from there you can begin making the right investments.
Tip #1: Buy the Right Investment
You’ll encounter many different market environments throughout your investing life, so don’t get too caught up in whether or not now is the perfect time to get started.
Buying the right stock can be challenging for “newbies”. Anyone can see a stock that’s performed well in the past, but anticipating the performance of a stock in the future is much more tricky. If you want to succeed by investing in individual stocks, you have to be prepared to do a lot of work to analyze a company and manage the investment.
Many advisors recommend the following investments for beginners:
- High-yield savings accounts: For some, this can be one of the simplest ways to help boost the return on your money above what you’re earning in a typical checking account.
- Certificates of deposit (CDs): CDs are another way to earn additional interest on your savings, but they will help tie up your money for longer than a high-yield savings account.
- 401(k)s: This can be one of the simplest ways to get started in investing and comes with some major incentives that could help benefit you now and in the future.
Tip #2: Avoiding Individual Stocks
At times, people have an unrealistic expectation about the kind of returns that they can make in the stock market – and at times new investors can confuse luck with skill. While you could get fortunate by picking an individual stock, it’s hard to be lucky over time and help avoid those big downturns.
In order to make money consistently in individual stocks, you need to know that the market is not pricing the stock price. For every seller in the market, there’s a buyer who could equally profit from purchasing your shares.
Luckily, there are alternatives for individual stocks. Mutual funds or exchange traded funds (ETF’s) can be good ways to help maximize your earning potential. These funds hold a lot of stocks and each share you purchase of a fund owns all the companies included in the index.
Tip #3: Diversify Your Portfolio
Having a diversified portfolio is a key advantage in the world of investing. There is a popular phrase used in the investing world and it’s “don’t put all of your eggs into one basket.” Diversification essentially helps reduce risk in the long run and helps boost your overall performance – even if one stock turns sour.
A simple way to help broaden your portfolio is through an ETF of mutual funds. These products have diversification built into them, which is a win-win on both ends of the spectrum. However, active investors also need to be careful not to over-diversify since holding too many stocks reduces returns without as much of an incremental benefit from a reduction in losses or volatility.
Tip #4: Be Prepared for a Downturn
Investing can be a tricky thing. It’s easy to get caught up in the hype and excitement of the market, but it’s important to remember that it’s always going to change—and sometimes, things will go wrong. When this happens, stomach the losses.
The hardest thing for many investors is to handle a loss in their investments. As long as you diversify your portfolio, any single stock that you own shouldn’t have too much of an impact on your overall return. If it does, (as mentioned above) buying individual stocks might not be the right choice for you. Even index funds will fluctuate, so you can’t get rid of all of your risk, try how you might.
Tip #5: Stay Committed to Your Portfolio Long-Term
The stock market is volatile and unpredictable, but there are things you can do to help you stay calm and collected during these times.
One strategy for beginners is to set up a calendar and predetermine when you’ll be evaluating your portfolio. Sticking to this guideline will help prevent you from selling out of a stock during some volatility – or not getting the full benefit of a well-performing investment.
Another tip is to divorce yourself from the daily financial news cycle. By skipping this information, you’ll help develop patience, which you’ll need if you want to stay in the investing game for the long-term. It’s also useful to look at your portfolio infrequently, so that you don’t become too unnerved or too elated. These are great tips for beginners who have yet to manage their emotions when investing.
Investing with Johnson Wealth and Income Management
Now that you have a couple of tips to get you started on your journey to investing in the stock market, enlisting a Fiduciary advisor can help guide you through those investments in further detail.
Offering a host of investment products and educational resources, the Fiduciary advisors at Johnson Wealth and Income Management, are highly experienced in many areas of finance, specifically financial portfolios and investment strategies. We will work with you step by step to help ensure your portfolio is diversified in order to help achieve minimal risk.
With our years of experience and knowledge, we can help you determine which investments are best suited for your individual goals and needs. Contact us today to set up your complimentary consultation.
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