Investing in the stock market is a great way to build wealth over time. The following are six tips and principles beginning investors can follow to be successful while making modest investments in the stock market.
- Set Long-Term Goals
Few people make money quickly on the stock market. Most successful investors make regular investments, avoid unnecessary financial risk and let their investment dollars grow over a period of years or decades. That’s the safest way to make money on the stock market. People looking to get rich quick on the stock market tend to lose their money. The stock market can be volatile, however, over the long term people that make wise picks and hold them for a long time tend to make money. The size of your investment, your net annual earnings and the length of time you leave it will determine how much money your investment makes.
- Understand Your Risk Tolerance
Risk tolerance means how much risk you are comfortable taking with your money. Younger people are usually willing to take more risks with their money because they feel they have more time to make it back. Older people and people with limited resources tend to be more conservative with their investments. Once you decide how much risk you’re willing to take with your money you’ll be able to better decide if you prefer investing in relatively safe stocks and making small but steady returns, or making high risk high reward investments.
- Control Your Emotions
People that cannot control their emotions and make logical investment decisions tend to lose money in the stock market. The short-term value of stocks tend to be driven by emotions, rumors, hopes, fears, and speculation, rather than systematic analysis and logic. Being able to remain calm and consider all the facts tends to lead to good investment decisions. When you invest in a stock you should understand why you did so, and at what point you will liquidate your assets. That’s called your exit strategy. And you should execute your exit strategy unemotionally when the time is right.
- Handle Basics First
Learn the basic rules about the stock market before you begin investing. This includes financial definitions and metrics like P/E ratio, return on equity, earnings per share and compound annual growth rate and how they are calculated. Learn about Stock Selection and Timing, fundamental and technical analyses, Stock Market Order Types and Investment Accounts including cash accounts and margin accounts. You should also learn about how margins are calculated and the difference between initial margin requirements and maintenance margin requirements.
- Diversify Your Investments
You can diversify your investments by purchasing stocks in different companies, different industries and even in different countries. This helps to ensure one bad event won’t wipe out all your investments. It also enables you to get dividends from several different companies and recover if one or more of your investments loses money.
- Avoid Leverage
Leverage means borrowing money so you can execute your desired stock market strategy. Banks and brokerage firms loan people with margin accounts money to buy stocks, usually for 50% of the stock’s purchase value. If the stock goes up you get 50% of the profit. If it goes down, you lose your money and you owe the bank or brokerage firm money plus interest.
Making investments in the stock market can help to grow your money over time if you save consistently, invest time to learn about investing, manage your risk and are patient. The younger you are when you begin the better your chances of success.