Did you decide that this year you would start saving more and making your money work for you? That’s a great resolution but in order to do that, you’re going to have to go outside of your normal bank account and become an investor. Often, that means investing in stocks but before you put your money to work in the stock market there’s a lot to learn. Losing money in the markets is a lot easier than making money so let’s go in armed with knowledge.
Although not a hard and fast rule, it’s best to save $5,000 or more before putting it in the stock market. This allows you to diversify your portfolio without the broker commissions eating away a large portion of your gains. If you don’t have that much money ready to deploy, keep reading but start saving. We aren’t going to head to the market just yet, there are a few more steps to take before putting real money to work.
Learn About the Markets
Learn about the stock markets and how they work. Know what it means to own a share of a company and what causes the price of a stock to go up and down. The short version is that owning stock means you own a company and prices go up and down based on supply and demand. After you gain a basic understanding of the markets, learn how to evaluate the health of a company. Learn how to read a balance sheet, income statement, and their annual report. Understand what the P/E ratio, beta, and PEG rates mean? Finally, learn some basic chart reading skills.
Seem a little overwhelming? It will take time to learn everything you need to know but isn’t that true of everything? If you want to do it right you have to put in the time.
There’s no reason that you can’t put some money to work in the stock market today. In fact, give yourself a $10,000 loan and trade on paper. Sites like Yahoo! and Google allow you to set up virtual accounts where you use virtual funds to invest. If you make a mistake, (and you will) you only lose fake money, not real money. What you gain is an education and experience that is every bit as valuable as all of the reading you’ve been doing to learn about the markets.
Ideally, trade virtual money for one year before putting real money to work. Markets and each individual stock have a personality of their own. As you spend time buying and selling stocks, you’ll learn to find these behaviors. Don’t be in a rush to use real money, you can afford to wait a year.
Avoid the weekend seminars that will show you how to make big money because it’s probably a scam. They’ll charge you a “reasonable” price of sometimes more than $1,000. If it worked, everybody would do it and there would be a seminar about it. You can’t be a top producer in anything after one weekend of schooling, unless you’re the one teaching the classes and collecting the fee.
Avoid penny stocks. As a new investor, avoid any stock under $5 and always stay far away from stocks under $1. There’s no doubt that there are some penny stocks that will one day become big companies but your chances of finding them are slim. It’s better to buy fewer shares of a proven, high quality company than to buy hundreds of shares in a penny stock.
Don’t use the investment markets as a casino. If you want to gamble in the hopes of a big payout, go to Vegas. Although a lot of people try to use the investments markets as a way for quick money, it doesn’t work for long term capital growth. Invest with the idea that your money will grow relatively slowly over a long period of time.
Use ETFs along with individual stocks in your portfolio. Studies show that it is nearly impossible to beat the market so purchasing an ETF that tracks the performance of the overall stock market is a great investing strategy.
Try to have a minimum of five types of investment products in your portfolio. Your positions could be two stocks and three ETFs (Learn more about ETFs here ) or three stocks and two ETFs or another combination but never put the majority of your money in one product.
Don’t be in a rush to put your money to work. Wait until you not only feel comfortable evaluating companies but your virtual account shows more successes than failures. Make highly conservative choices at the beginning of your journey.
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