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Taking your money and dropping it into different investment vehicles may seem easy. But if you want to be a successful investor, it can be really tough. Statistics show that most retail investors—those who aren’t investment professionals—lose money every year. There could be a variety of reasons why, but there is one that every investor with a career outside the investment market understands: They don’t have time to research a large number of stocks, and they don’t have a research team to help with that monumental task.
The stock market isn’t like your grocery store: To buy and sell stocks, you must shop through a licensed brokerage, which makes trades on your behalf.
If you’re not well-versed in the basics of the stock market, the stock trading information spewing from CNBC or the markets section of your favorite newspaper can border on gibberish.
Phrases like “earnings movers” and “intraday highs” don’t mean much to the average investor, and in many cases, they shouldn’t. If you’re in it for the long term — with, say, a portfolio of mutual funds geared toward retirement — you don’t need to worry about what these words mean, or about the flashes of red or green that cross the bottom of your TV screen. You can get by just fine without understanding the stock market much at all.
If, on the other hand, you want to learn how to trade stocks, you do need to understand the stock market, and at least some basic information about how stock trading works.Understanding the stock market
When people refer to the stock market being up or down, they’re generally referring to one of the major market indexes.
A market index tracks the performance of a group of stocks, which either represents the market as a whole or a specific sector of the market, like technology or retail companies. You’re likely to hear most about the S&P 500, the Nasdaq composite and the Dow Jones Industrial Average; they are often used as proxies for the performance of the overall market.
Investors use indexes to benchmark the performance of their own portfolios and, in some cases, to inform their stock trading decisions. You can also invest in an entire index through index funds and exchange-traded funds, or ETFs, which track a specific index or sector of the market.
The stock market can help you make a lot of money, but you can lose all your money if you are tempted to invest randomly without knowing the nitty-gritty of the market. Here’s 8 Things You Need to Know Before Investing in Stocks:
1) Investing in stocks is one of many options for investing your money.
It’s pretty hard to avoid hearing about the stock market in one way or another. News about the stock market shows up on practically every news report you hear on the radio or on television. However, just because the newspaper and the financial media talk nonstop about stock investing doesn’t mean it’s the only way to invest your money. It’s merely one option.
2)Never jump blindly into stock markets
Many a times it happens that while talking to your friends and colleagues, the discussion heads towards the stock market, and also how the stock market helps investors make big money. You might never have invested in the market, but after hearing about all those things you also decide to buy some stocks. However, if you entered the market just to remain in the mainstream fashion, you have landed in for the wrong reason. You should invest in the stock market after getting the basic knowledge about it and in accordance with your financial goals.
3)Consider an appropriate mix of investments.
By including asset categories with investment returns that move up and down under different market conditions within a portfolio, an investor can help protect against significant losses. Historically, the returns of the three major asset categories – stocks, bonds, and cash – have not moved up and down at the same time. Market conditions that
cause one asset category to do well often cause another asset category to have average or poor returns. By investing in more than one asset category, you’ll reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride. If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category.
4)Create and maintain an emergengy fund.
Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to six months of their income in savings so that they know it will absolutely be there for them when they need it.
5)Avoid Leverage
Leverage simply means use of borrowed money to execute your stock market strategy. In a margin account, banks and brokerage firms can lend you money to buy stocks. It sounds great when the stock market is moving up, but consider the other side when the stock market or your stock goes down. In that case your loss would not only erode your initial investment, but you will also have to pay interest to the broker. Leverage is, thus, a tool, neither good nor bad. However, it is best used after you gain experience and confidence about your decision-making abilities. Therefore limit your risk when you are starting out to ensure you can profit over the long term.
6)Control Your Emotions
The biggest barrier to stock market profits is lack of ability to control one’s emotions and make logical decisions.
Many investors have been losing money in stock markets due to their lack of ability to control emotions, above all fear and greed.
In the short-term, the prices of companies reveal the combined emotions of the entire investment community.
When a majority of investors are worried about a company, its stock price is likely to decline and when a majority feel positive about the company’s future, its stock price tends to rise.
A person who feels pessimistic about the market is called a “bear,” while their optimistic counterpart is called a “bull.”
During market hours, the constant battle between the bulls and the bears is reflected in the constantly changing price of securities.
These short-term movements are driven by rumours, speculations, hopes and emotions, rather than logic and a systematic analysis of the company’s assets, management, and prospects.
7)Periodically Monitor Your Investment
It is very important to monitor your investment and review it periodically, as an important event happening in any part of the world does have an impact on the stock market.
Also, any financial event related to a particular company or sector impacts stock price.
8)Most stocks pay you dividends, which provides a stream of income for you without having to sell the shares.
While investors are very interested in the rise and fall of the value of stocks, they’re also very interested in the dividends that many stocks pay.
Dividends are small payments that companies pay out to each stockholder, usually a small amount. For each share of stock that you own in that company, the company will pay you some small amount – usually less than a dollar – on a regular basis, typically every quarter. So, let’s say you bought shares in a company where the shares are $20 each. You invest $1,000 (and pay all fees yourself), so you own 50 shares. The company then pays a dividend of $0.20 each quarter, which means that every three months, the company will pay you $0.20 per share times 50 shares, or $10.
That dividend money is in addition to the normal value of the stock. Naturally, companies that pay a nice dividend tend to have more valuable stock than companies that don’t ever pay a dividend (though this isn’t an exact rule, of course).
Many large investors own enough stock so that they can live off of dividends. Take that $20 stock. If you had $1,000,000 to invest, you could own 50,000 shares of that stock.
Conclusion
One key way to protect your assets is to invest for the longer term by taking advantage of dividends and finding stocks with a proven record of success.