Gone are the days when you’d have to call someone on the trading floor to buy and sell an order and have to wait for the next day’s paper to check if your stock has gone up or down and by how much. Today, the modern investor is armed with a plethora of tools and resources that make it easy to invest. But simply being able to open an investment account in a matter of hours is by no means an indicator of profitability. To succeed as an investor, you’ll have to make smart choices.
Know the Difference Between Investing and Trading
It’s quite easy for the novice investor to mistaken trading for investing and for good reason. Both financial activities involve the same sign-up and acquisition process. You buy stock in the hopes of being able to sell it for a higher price than what you paid for it. However, the key difference is that trading involves taking speculative bets rather than value-oriented positions in the market. As Benjamin Graham, the so-called Father of Value Investing, says, traders view themselves as playing with expensive assets with no intrinsic value while investors view themselves as part of the business that they are buying into.
Even though you have a considerable savings account, say $10,000, it’s not a smart move to pour it all into the stock market in one go in the hopes of doubling that amount in a matter of months. After all, the more you put into the stock market, the higher your return rate, right? Unfortunately, while there is truth to that, it also means a higher risk of losing all your hard-earned money when an unforeseeable event happens, such as the company getting hit with a billion-dollar lawsuit or macroeconomics forcing risk-aversion sentiment across the globe. While there is no specific percentage or dollar amount you should start with, never put all your money in one position or invest it all in one go.
Do Your Own Research
Thanks to the golden age of information, you have plenty of resources for stock market investing for beginners that can teach you financial jargon, real-world risk management practices, technical strategies, legal implications, etcetera. Smart investors use this information to make their own investment decisions rather than follow the herd. Although investing celebrities, like Jim Cramer, are informative and entertaining, solely relying on their input for your investment picks can limit your opportunities to make a profit.
Keep Your Strategy Simple
There are dozens of technical indicators, from MACDs to Bollinger Bands, and an equally copious amount of strategies that you’ll encounter along your investment education journey. And you might think that cramming as much of these tools and algorithms into your stock charts will commensurately increase your chances of being right and making money. But many of these indicators are lagging, meaning the stock’s price has already moved before the indicator can tell you to buy or sell, hence all they really do in the long run is confuse you with all of these different pieces of data that you now have to follow. Stick to company fundamentals, including sales and revenue numbers, to determine the company’s and underlying stock’s value.
Keep Your Emotions Under Control
FOMO and greed are two very dangerous emotions that emerge during investing activities. FOMO, or fear of missing out, forces a novice investor to always be invested in the stock market despite the lack of signals to do so. It also results in investors not closing a losing position out of fear that the stock price might turn and surge back all the way to their original entry price and even more. Greed works in a similarly detrimental way when it comes to investing. You refuse to close a winning position despite it hitting your target price. As a result, the position turns back down and eats up any of the unrealized profits you had. Use logic and reasoning rather than emotions and gut feelings when you make investment decisions.
Investing in the stock market is a great way to accelerate wealth accumulation. But these opportunities to profit do not come without their inherent risks. Manage them by making logical decisions, keeping things simple, conducting due diligence, buying for the long-term, and starting slow and steady.