As a beginner investor in the stock market, it is critical that you understand the fundamentals. There are millions of investors out there and even more competing theories and strategies about how to make money in the stock market.
However, if I was ever lucky enough to go back in time and be a true beginner again in the stock market, here are the 7 stock market investing tips I would give to myself that I have learned over the last decade.
1) Always Be Learning
Now that you have chosen to begin to create the financial future that you desire through investing in the stock market, it is time to learn everything you can about investing in the financial markets.
You do not have to become an expert to set yourself up nicely in the future, however, you do have to be engaged in the market as much as possible.
One of the ways to make sure you are engaged in the markets and have an active understanding of what is happening from day to day is to continue to learn.
Read as many books as possible. Go to meetups and seminars. Watch all of the financial TV shows. Eventually, you will find strategies and risk levels that work for you.
Why not try to get there as soon as you can?
2) Have A Long Term View
Unfortunately, you will not get rich overnight. However, it is possible to get rich over the course of a lifetime of investing.
Making decisions with the goal of creating quick wins or large short terms wins typically requires taking a risk that is not accounted for, and the larger and faster those desired win are, the larger the losses eventually will become. Get over your impulses for stock investments, buying on impulse can ruin your investment entirely.
Having a long-term view in investing allows for sound investment strategies; those of which have a long-term outlook that does not involve taking large short-term risks.
Trying to time the market is virtually impossible, so I recommend having an outlook of at least one year for every investment you make as a beginner.
3) Keep Your Trade Size Small
Positions will go against you, there is no doubt of that fact. Even for the likes of Warren Buffet or Carl Icahn, nobody is immune to taking some level of losses in the stock market.
However, to prepare for the losses that will undoubtedly come, we must always make sure to keep the amount we allocate to each position under 10% at all times.
If we have a portfolio made up of four positions and evenly distribute 25% of our capital to each position, we are at much greater risk when compared to only allocating 10% to each position. If we take a 20% loss in one of the four positions, the entire account would see a drawdown of 5%.
However, if one of those positions took a 20% loss and every position only had 10% allocated to them, the portfolio would only see a drawdown of 2%.
As a beginner, you should never have any one position greater than 10% of the total size of the portfolio.
4) Buy In Quarters
Now that you are not allocating more than 10% to any one position in your portfolio, we are going to go one step further to assure you are in the game for the long run.
How can you make any money if you have no money left in your account, right?
If you see an opportunity you like, rather than putting the 10% into the investment right away, put one-quarter (2.5%) in.
As we mentioned above, it is very difficult to perfectly time the market and buying in quarters allows us to have the opportunity to add to our investment at better prices if we do not time the investment perfectly.
A small victory is greater than any loss, and we recommend buying in quarters as a way to dollar cost average investments that do not immediately go in your favor.
5) Start With ETFs
Here is a likely scenario you may find yourself in as a beginner investor. Facebook, Amazon, Netflix, and Google all look like incredible investments that you HAVE to get your hands on. I get it, you do not want to miss the next up move!
While I agree that all four of these FANG stocks are fantastic companies, beginners should consider an ETF rather than purchasing and managing positions in four different stocks that all act similarly.
The advantage of an ETF is diversification or the process of spreading out your risk amongst many asset classes and stocks. ETFs also have much fewer volatilities for that very reason, which only adds to their appeal for beginner investors.
While it may be tempting to purchase all four of those wonderful companies at the same time, as a beginner, we recommend buying ETFs.
6) Don’t Panic
While you are now making sure your investments are small in nature, you are buying in quarters, and diversifying with ETFs, sadly, markets will still move against you.
But when markets move against you, this is not the time to panic! You have set yourself up very nicely for long-term prosperity via the financial markets.
Unfortunately, sometimes the market reacts irrationally, but some of the best investments ever have come from times when stocks were making wild moves.
Do not panic. I would argue that some of the best buying opportunities come from times when people and markets and in panic mode.
The good news is, now that you have your positions very small in nature, you will always have cash on the sideline ready for these rare opportunities.
7) Build Wealth Over Time
While we have already touched on this subject, building wealth over time (and not overnight) is a critical concept for beginner investors to understand.
The goal for us beginners is to make safe and sound decisions for the long term. Quick buck artists come and go, but the long terms investors are in the game forever.
There you have it. Our 7 stock market investing tips for beginners. The 7 tips I wish I would have known when I started over a decade ago. Here is a summary of what we have spoken about:
- Always Be Learning
- Have A Long Term View
- Keep Your Trade Size Small
- Buy In Quarters
- Start With ETFs
- Don’t Panic
- Build Wealth Over Time
Does anyone have any other stock market tips they think would be great for beginners to the stock market?