Beginner stock market investors are those who only have relatively rudimentary knowledge and experience in the investment field. Most of these individuals usually start out by sticking to a ‘buy and hold’ trading strategy. As a beginner, your general experience in trading stock market investments is very limited.
This, for the most part, limits you to making no more than a few possible trades each month from a cash account. However, this does not mean that you do not place high hopes on your stock market trading activity. Most likely you are very interested in expanding your investment knowledge and experience to realize the goals you may have set. This is all well and good.
However, most beginners are generally completely unaware of the right investment timing and dedication required in investing and trading. This makes many of them very vulnerable to starting unsuccessful investments. This type of stock market investment is purely based on instinct and hearsay, not an investment based on actual research.
Most beginners usually understand the idea of buying low and then selling high. However, they are very prone to letting their emotions guide their actions, once a trade or investment has been made. As a result, many of them desperately clung to the securities resulting in heavy losses. Mind you, even when the exact reason that prompted them to make the initial investment in a particular security becomes untenable.
As such, most of them find themselves hoping or anticipating that ‘losing’ stocks will be able to recover for them to be in a good position to regain. If a higher price appears, these beginners then choose to exit immediately. This usually prompts them to sell their shares at break even or perhaps after they have realized only insignificant profits.
In general, it is always difficult for beginners to distinguish a forest from just trees. Also, they find it difficult to recognize whether the future prospects of a particular security are favorable, even if the short-term trading trend is not volatile. Beginners are usually successful during a strong bull market. But unfortunately find themselves clueless on more difficult occasions, especially when market volatility is higher and the ‘bears’ happen to reign. Well, if you think this description is perfect for the T, here are some basic stock market investing for beginners, which you might find useful.
Make it a point to set realistic trading goals
Before you decide to make your first investment, try to ask yourself the following questions. “At what point do you need the money you’ve invested?” “Is it after 6 months, a year, 5 years or maybe even longer?”, “Are you trying to lay eggs for your sunset years?”, “Are you looking for the funds needed to finance your college education or maybe looking for money to buy a house?” “On the other hand, do you want to build up the legacy you want to leave for your heirs after your death?”
Whatever the case, before making any investment, you must fully determine your main driving motivation. Once you have ascertained this tipping point, next consider the most likely time in the future you may need the funds you wish to invest. If you need your investment back in just a few years, then it would be much better to consider other investment channels. It is very important for you to fully understand that the stock market with its volatility cannot provide a guarantee when your investment will be available.
Therefore, you should always take into account in advance how much cash you want to invest and what type of ROI you think is suitable for realizing your trading goals. As a rule of thumb, always remember that the growth of your stock market portfolio ultimately depends on 3 interdependent factors. This is the exact capital you decide to invest, the amount of annual income on your investment. And lastly, how many years exactly do you want to invest your capital in the stock market.
Take the time necessary to determine your risk tolerance effectively
Risk tolerance happens to be a psychological attribute, which is genetically oriented. However, it can still be significantly affected by factors such as education, income, or even wealth. As all of these factors increase in value, risk tolerance also tends to increase. Basically, your exact level of risk tolerance can be accurately described as how you feel about any risk you take. As well as the level of anxiety you tend to experience whenever you decide to undertake a risky venture. Take some time to ask yourself, “Can I risk $100 to get $1,000 or maybe $1000 to get $1,000?”
It is very important that you fully understand that everyone has a different level of risk tolerance. This of course means that there is no such thing as a ‘right balance’ in this given problem.
At the same time, risk tolerance can generally be influenced by a precise ‘perception’ of the risk one is willing to take. This given concept of risk tolerance is the most accurate when it comes to investing or trading the stock market. As you master the basics of trading, you will find that the idea of the risk involved in such things is generally lower. This includes having a very good understanding of how to buy and sell stocks, assessing market volatility (changes in price). Along with the ease or difficulty of liquidating capital market investments.
This usually leads to a reduction in the overall anxiety you are bound to experience when you trade or invest in the stock market, due to your ‘perception’ of the risks involved. So, by taking the time necessary to fully understand your true risk tolerance, you will be able to avoid trading in the investments you fear. Ideally, you shouldn’t invest in assets that have the potential to keep you awake at night. Anxiety triggers fear which in turn triggers an emotional response to the stressor. By staying calm during stock market uncertainty, you will be able to follow an ‘unemotional’ decision-making process in your stock market activities.
Get in the habit of keeping your emotions away from your investments
By far the biggest obstacle many beginners face on a regular basis is their inability to regulate their emotions and continue to make logical decisions. In the short term, the company’s stock price matches the combined emotions of the entire investment community. When most stock market investors are anxious about a particular company, its share price is bound to fall. Or, when most traders have a positive perspective on a company, its share price will naturally rise.
People who maintain a negative perspective on the stock market are known as ‘bears’. Whereas those who have a positive view of the same thing are known as ‘bull’. During market hours, the relentless struggle between bulls and bears is usually reflected in the constantly fluctuating price of securities. These short-term fluctuations generally arise from rumours, speculation and in some cases even hope. All of these factors can aptly be labeled as emotions. Effective stock market investment requires a logical and systematic analysis of the company’s assets, management, and future prospects.
At this point, it’s important to remember that stock market prices can move against most expectations. For the inexperienced, this can trigger insecurity and tension. At such times, you will face a dilemma – “Should you sell your position to prevent a loss?”, “Or should you continue to hold your position in the hope that the price will eventually rebound?” Even when the price performs as you would expect, you will still face nagging questions. “Should you take profit now before the price drops?”, “Or should you hold on to your position because the price could go even higher?”
Dealing with all this confusing thinking can trigger a lot of worry, especially if you are constantly monitoring the prices of the securities you are trading. These emotions can ultimately drive you to take certain actions. Since your emotions are the main motivation, chances are that your actions are wrong.
When you buy stock, you should only do so for lawful reasons. In addition, you should have realistic expectations of how the price will perform if the rationale for your guide proves to be accurate. Finally, before investing in any stock, always take the time to determine the exact point at which you will liquidate your holdings, especially if your reasons are proven wrong. Overall, always have a proper ‘exit’ strategy before buying any stock, and make sure to execute it emotionlessly.
Make it your business to learn the basics of stock market investing comprehensively
Before making your first stock market investment or trade, make sure that you fully understand all the basics of the stock market along with the individual securities that make up it. Below are some of the most important areas that you should be well versed in before starting stock market activity.
To get started, take some time to understand the exact financial metrics and definitions used in stock market trading. Some of the most notable are P/E ratios, earnings/shares, return on equity and compound annual growth rates. Take your time to fully understand how this metric is usually calculated. It is important to state that being in a position to effectively discern how companies use these metrics is critical to successful stock market investment operations.
Next you should learn all about the most popular stock and timing techniques. For this purpose, you must understand how fundamental and technical analysis can be executed. More importantly, how do they vary and when is the right time to use them in a stock market trading strategy. You should also be conversant with the different types of stock market orders. Take the time you need to fully understand how market orders, limit orders, stop market orders, stop limit orders and trailing stop loss orders vary from one another.
Finally, you should learn all you can about the different types of stock market investment accounts available. You may be familiar with cash accounts which are arguably the most commonly used by capital market investors. However, what is known as a regulatory margin account, is required when you wish to make certain types of stock market trades. So make sure you really understand how margin accounts can be calculated. You should also find out about the exact difference between initial and maintenance margin account prerequisites.
Make it a point to diversify your stock market investments
When you have done all the necessary research that helps you determine and even measure risk, making the decision to diversify your stock market portfolio can be a very smart move. The same is true, when you are completely ‘comfortable’ that you will be able to pinpoint the potential hazards that might jeopardize your position in a stress-free manner. In both scenarios, you will be able to liquidate your stock market investments before they incur dangerous losses.
Therefore, the wisest way to effectively manage stock market investment risk is to diversify your exposure. You should know that most of the astute stock market investors, make it their business to own shares of different companies, different sectors and even different countries. T
he main driving force that motivates them to do so is the firm guarantee that one unfavorable event will never affect all of their holdings. At the heart of all this is the undeniable fact that stock diversification can allow for a comfortable recovery from the loss of one and even some of your investments.