How to Get Started Making Money in The Stock Market
To an outsider, the stock market can be daunting. There’s so many terms to learn and potential companies to invest in. But there’s also the chance to lose substantial money. In the past 200 years, the stock market has outperformed investing in bonds, gold and Treasury bills which makes it an exciting option for investment. This guide will cover the basics for making money in the stock market.
Learn the Terminology
Learning the basics of trading is the first step to getting started.
- Dividends: These are usually paid on a quarterly or annual basis to shareholders. Shareholders have the option to reinvest these dividends for more shares
- Broker: An organization or person that buys and sells stock. They are regulated professionals.
- Portfolio: A grouping or collection of financial assets. There can be any amount of assets in a portfolio, from one to thousands.
- Yield: The annual dividend is divided by the price of a share.
- Bear Market: Terminology used to describe a market that is in a down trend. Usually means stock prices are falling.
- Bull Market: This is the opposite of a bear market. It means share prices are increasing, which encourages buying.
Different Types of Investors
Personality plays a big part of trading and each investor has different reasons for buying particular stock. Despite individuality, most traders fall into a few distinct categories:
- Active investors: This person has a great interest in trading. They keep up to date with worldly financial news and always have an eye on their investments. They don’t always buy today and sell tomorrow, but they are always monitoring trends.
- Passive investors: This person usually has much smaller goals and likes to take a back seat. They manage risk as low as possible and don’t mind playing the long game. They will often rely on their advisor’s recommendations.
- Speculator investors: This person has the philosophy of beating the market. They will research heavily for opportunities and jump on stock that fits their criteria. They’ll often sell fast with the belief that the next opportunity is right around the corner.
- Retirement investors: This person is the most patient and risk averse. Their primary goal is to attain a retirement nest egg.
Similar to virtually any industry, making money takes time. It’s a common misconception that the stock market can make anyone rich overnight. It’s simply not true. As soon as you acknowledge and understand this, you will have much more of a realistic approach to trading. Understanding this, by attempting to invest large amounts of capital in short spaces of time, it will most likely end in disaster unless you become incredibly lucky. Always keep long term goals in sight and look at the bigger picture.
Realistic goal setting and managing expectations is imperative. Know that a return from investing takes time and isn’t a get rich quick scheme. Taking a thorough look at your current financial situation and knowing what you can afford to invest is realistic. Claiming you’re going to invest $1000 per month despite not having your finances under control is not tangible. Create a clear goal of the amount you’ll like to invest annually or monthly.
Patience is Key
Comparable to mentioned above, patience is a very important part of trading. Often people will complete a few short courses or read a book about the stock market and expect to be an expert immediately. Learning the market takes time.
Many novice investors have the attitude of “Since the casino is open, now is the time to play”. The second the stock market opens, people feel the need to do something. It’s the same feeling a person gets when inside a casino – the atmosphere creates the need to spend. Taking a step back and using patience can prevent an unnecessary loss of money. Wait and research.
People need to invest in their education to fully understand and to make smart investments. The market will be unforgiving on those who dive straight in with an open wallet that place trades randomly. One needs to understand the market and educate themselves so they can make smart trades and predict potential investments.
Researching companies is important to stay ahead of the game. Asking yourself questions like “Will this business continue to serve it’s need in the future?” and “Is the business expanding to new markets?” can give you a good indicator of stock purchases and expanding the portfolio. Be aware that a company is letting go of a large number of employees is a huge warning sign. Likewise, a healthy company can still go down in value, even if their numbers are solid. Remember that the market is volatile, even for companies that are performing well. Researching minimizes these risks.
It’s common sense, but perhaps often overlooked that you should never place too much trust in advisors and experts. It’s a good idea to take what they say in to consideration but never place too much faith in them. A good rule of thumb is to research your information from a range of sources and don’t place too faith into a single individual. Ultimately, trading is down to you as a person and it’s your money to trade. It’s not your advisor’s money.
Losing money when trading is always a potential outcome. Losing money will require you to have skills that efficiently manage risk. A way of putting this skill in to action is limiting yourself to the amount of money you will risk on each trade relative to your total capital. Which means, for each trade you will remove the possibility of risking too much money. A good example of this is limiting yourself to a certain percentage of your trading capital. A good rule of thumb is to leverage your trades at no more than 2% of total capital. For example, if you have $1,000 in total capital, you should invest no more than $200 to completely minimize the risk of a devastating loss.