The stock market can be an incredibly lucrative place to make money, but it can also lead to some big losses if you aren’t careful. Whether you’re just starting out in the investing world or have been trading stocks for decades, there are plenty of ways to make better investments and avoid costly mistakes. Here are 8 top tips on how to invest in the stock market and start investing wisely today!
1) Choose an appropriate broker
Your broker is your partner, so it’s important to find one that you can trust and has a breadth of knowledge. In other words, do your research! Each brokerage will have its strengths and weaknesses, from education resources to investment selection. Choose one that caters to your trading style and matches your investment goals. For example, if you want help deciding what stocks to buy or prefer individualized advice about how much risk you should take on in any given trade, look for a full-service broker; if price is an important factor for you when choosing a stock, consider discount brokers. They offer many of the same tools as full-service brokers at lower prices with fewer frills.
2) Develop a sensible strategy
There are many ways to invest in stocks and it’s important to develop a strategy that fits your investing style. Not sure how to do that? Start by defining your short-term, mid-term and long-term goals (and make sure you’re not biting off more than you can chew). A great way to set these goals is with a financial planner. Then, once you have an idea of where you want to be, figure out what sort of investments are best suited for your timeframe and risk tolerance.
3) Give it time
There’s no easy way to say it—the stock market is complex, and it takes time to learn all of its nuances. In other words, becoming a great investor takes dedication and patience. To ensure that you don’t lose money due to rash decisions or poor timing, consider working with a financial advisor who can teach you how to invest well. If you feel that a professional is beyond your budget, then start small: open an account with one of the most affordable brokers out there. You can easily find many reputable options online, but make sure that they’re licensed properly so you know they won’t scam you!
4) Consider your needs
There are numerous types of investments to choose from. The first step is to figure out what you need. A young, high-earning professional will likely have different needs than someone who is retiring soon or an elderly couple on a fixed income. A safe investment like a savings account is good if you plan on using your money in the next five years; stocks and real estate are better suited to those with more time and risk tolerance. When considering your needs, be realistic about your risk tolerance (i.e., how much of your portfolio can be safely put at risk). If you’re fairly new to investing, skip stocks altogether and opt for low-risk investments like bonds until you know what suits you best.
5) Stay disciplined
No matter how much you’d like to make a quick buck, you should never invest more than you can afford to lose. While researching stocks and strategies may feel satisfying, don’t forget that investing is more an art than a science. As a result, there are no sure bets. Furthermore, while it’s certainly important to research companies and industries as thoroughly as possible before buying stock, if you get too bogged down in statistics (the price-to-earnings ratio of company X doesn’t look good or company Y is losing money), you’ll end up missing out on your best investment opportunities—those that look great on paper but are obvious investments because everyone else has already caught on.
6) Have realistic expectations
Trading stocks is a great way to make money, but it’s not something that happens overnight. It can take a lot of time, energy and dedication before you’re successful at it. Be sure to keep your goals realistic. Remember that trading is much more of an art than a science, so even experienced traders aren’t always right. Be prepared to accept some losses along with your wins—and know that they are part of investing, rather than something you should beat yourself up over when it happens. If you do end up taking a loss, just remind yourself that every trader has losses and treat it as part of being involved in the market.
Diversification—holding a portfolio of investments instead of just one—is another way to reduce risk. If you have $10,000 to invest in stocks, your investments might look something like: • $2,000 invested in McDonald’s • $1,500 invested in Microsoft • $1,500 invested in a real estate company • $500 invested on eBay • $3,000 cash This type of diversification can protect you if one investment fails or hits a rough patch. If most of your money is tied up with McDonald’s and it starts to decline dramatically (and it will at some point), having other types of investments can cushion those losses.
8) Don’t give up!
If you’re going to make your money grow, you have to be willing to stay invested when others are pulling out. Many people pull out of stock market investments during a rough patch only to miss out on returns later on when things look up again. By staying invested, you give yourself a better chance at seeing positive returns over time—even if it takes several years for those results to play out. Keep your mind focused on staying invested, and avoid giving into knee-jerk reactions that could cost you big in the long run.