No matter how limited our knowledge of the stock market or trading actually is, we all know something about it at least. Whether it’s some small fact or a basic understanding of some terminology, even most movies and news stories assume a minimum knowledge of how it all works.
Despite this, stock market trading can be a challenging undertaking and can get extremely complex for amateurs who aren’t fully appraised of how its trickier aspects work. With this in mind, if you’re a beginner contemplating taking the plunge into stock market trading, here are five basic tips to help you on your journey.
Researching Your Investment
With the advent of the digital age and the rise of the smartphone, there’s now an app for everything. In that respect, stock trading apps are changing in 2024, since there’s now a far larger selection to choose from. The technology behind them is also advancing at a rapid pace, with tech trends like AI now being applied to such apps to make them smarter and more useful than ever before.
With all this technology and digital assistance available to the general public, anyone can now theoretically learn how to trade in stocks and other investments. Since beginners are often prone to making rash decisions or jumping into investments based on the notion of quick short-term returns, trading apps can be invaluable to help novices research the market and even practice trading before trying the real thing.
For beginners, researching the kind of stocks and things like their market position, short and long-term viability, and other crucial optics are key to making a sound investment. Since trading in stocks is based on anticipating the market, it can often take a lot of work to research and analyze a company before making a decision to invest in it.
Don’t Be Tempted by Individual Stocks
We’ve all heard the stories of how much a person could have made if they’d invested in Facebook back when the social media giant was still a relatively unknown company. Tales like those often romanticize the idea of trading and make it seem like choosing the right stock can make you a millionaire overnight.
While this is theoretically possible, in reality, it takes a mixture of patience and a deep understanding of the business world, economic factors, the stock market as a whole, and a variety of other factors to pick a life-changing stock on your first go. On the other hand, even if the right stock is chosen, a waiting game that can take years usually ensues for that stock to reach its potential.
Since many beginners have a short-term mentality, it can be tempting for them to become obsessed with finding and investing in that one stock that will change their life quickly. In most instances, beginners should be wary of chasing and investing in individual stocks. With all your eggs in one basket, if that stock fails or doesn’t perform as expected, instead of becoming rich overnight, a novice trader actually stands a greater chance of losing all or most of their investment if things don’t pan out.
Prepare for the Worst
Like gambling, playing the stock market is never guaranteed. Instead, it takes a lot of work, research, understanding, practice, and even luck to be lucrative. Just as responsible gambling enthusiasts know how to plan and manage a bankroll, beginner traders should also learn to create and stick to budgets for their trading. By doing so, not only can you mitigate losses, but you also accept into the bargain the very real possibility that you may lose money instead of making it.
Downturns should be factored into the investment cycle, and in the case of them occurring, you should stay committed and wait them out. Avoiding the temptation to sell during these periods can give investors a better chance of the stock rallying later on and help nurture sound investment strategies for future success. Just as a problem gambler can end up causing disastrous financial consequences for themselves, a trader who doesn’t prepare or accept that losses can occur may end up trading recklessly and possibly losing more money than they can afford to.
Diversify Your Portfolio
As a tonic to novice traders being tempted to chase individual stocks, a great rule of thumb is to invest in a diverse portfolio of stocks instead. The perk of this strategy is that it spreads the trader’s risk over a wider range of trades. By doing so, even if individual investments break even, lose money, or even fail altogether, other investments in the portfolio may still rally enough to result in an overall profit.
The more diverse your trading portfolio is, the greater your chances of making profits across one or more of them. This provides a great safety net and is especially encouraged for novice traders. As your knowledge, experience, and instincts grow, in time, you may get better at choosing winning stocks more often.
Until then, ensuring that your risk exposure is diversified is a great strategy to give yourself a greater chance of making a profit. At the very least, even if you still end up with a net loss, chances are having a diversified stock portfolio will at least mitigate those losses and make them more manageable.
Stay Committed
Once you’ve identified, either on your own, or through the help of an experienced and trustworthy broker (which is recommended for amateur traders), which stocks to trade in, you can execute your investments and should be prepared to wait thereafter. Short-term trading is not recommended for novice traders, since these kinds of investments can be a lot trickier to navigate and are generally more volatile.
A better option is to invest in a diverse portfolio and then be patient and wait out your investments. Long-term trading in company stocks usually comes with the benefit of dividends being paid out. While a company paying out dividends is never guaranteed and is usually tied to its performance, when sound investments are made, investors can usually benefit from dividends being paid by some of the companies they’ve invested in.
This means, over the long term, those dividends can become new income streams and be very lucrative depending on how much stock is purchased from that company. Overall, investing long-term also gives your chosen stocks a better chance of appreciating in value, meaning you will also have the option of one day selling them for a profit if you wish to.
Conclusion
Trading in stocks can be an excellent way to earn extra income and build up an investment portfolio. While most people have a general notion of how it all works, actual trading requires time, research, patience, and discipline to avoid unnecessary losses.
Some useful tips for beginners include avoiding individual stocks, maintaining a budget to avoid reckless trading, diversifying their portfolio, and being patient enough to invest long-term. By sticking to tips like these, amateur traders give themselves a greater chance of being successful enough to grow their investments, thereby turning trading into a viable second income.
