You work hard for your money. That is why it can sometimes be hard to simply drop it into different investments without truly knowing what is going to happen. However, if you want to be a successful investor, it can get tougher.
Many retail investors who aren’t investment professionals lose money every single year. There are reasons upon reasons why this happens. However, the one thing that every investor with a career outside of investment understands: There is not a lot of time to research a large number of stocks, and you don’t have a research team to help with that monumental task.
The moral of the story is that if you don’t complete the necessary research, you will end up losing money. That is the honest truth. However, the more you research, the more you can cut down those losses. If you’re wanting to learn more, head to VantagePointTrading today.
Let’s take a look at what you really need to know about the stock market.
Buy the right investment
When it comes to the stock market, buying the right stock is far easier said than done. Anyone can look and see that a stock has performed well in previous times. However, anticipating the performance of a stock in the future is far more difficult.
If you want to succeed when you invest in stocks, you have to be prepared to put the work in and analyze the company as well as manage the investment.
Dan Keady, CFP at TIAA says “When you start looking at statistics you’ve got to remember that the professionals are looking at each and every one of those companies with much more rigor than you can probably do as an individual, so it’s a very difficult game for the individual to win over time”
Avoid individual stocks as a beginner
At one point in time, everyone has heard about a big stock win or a fantastic stock pick. However, what they often forget is that they’re not talking about the particular investments that they also own that didn’t do as well as the ones they’re boasting about.
This sets up a very unrealistic expectation about the kinds of returns that you can expect when investing in the stock market. A lot of the time, luck is actually confused with skill. While you most definitely can be skilled at it, luck is the main ruler of it. However, luck does diminish over time.
Remember, it is so important to know that to make money consistently in individual stocks, you need to know something that the forward-looking market isn’t already pricing into the stock price. It is equally as important to keep in mind that for every seller in the market right now, there is a buyer for those same shares who is just as sure that they will profit from it.
Create and maintain a diversified portfolio
One of the key advantages of an index fund is that you immediately have a large range of stocks available to you in the fund. As an example, if you own a broadly diversified fund based on the S&P 500, you will then own stocks in hundreds of companies that spread over various different industries.
However, you could also buy a narrowly diversified fund focused on one or two industries. Diversification is incredibly important as it reduces your overall risk for any one stock in the portfolio that is hurting the performance. In fact, that itself will continuously improve your overall returns.
In contrast, if you are buying only a single individual stock, you really do have to think it through. That increases your risk of losing it all. The easiest way to create a diversified portfolio is by buying into an ETF or mutual fund.
The bottom line
Investing in the stock market can be an extremely rewarding thing. This is especially true if you do your research in order to avoid some of the main pitfalls that a lot of new investors experience when first starting out. Beginners should make sure that they find an investing plan that works in their favor and stick to it through both the good times and the bad.