The stock market has offered investors compelling returns over the years, but those rewards are certainly not without risks. Investors can potentially benefit greatly from trading stocks, but you need to research this particular market thoroughly before getting started.
No investment comes without risk, and the stock market is known for being volatile. Anyone who is not familiar with this volatility only needs to study famous market crashes, like those associated with the Great Depression and the 2008 financial crisis.
At the same time, the stock market has been around in one form or another for hundreds of years, and historically, it has produced some compelling returns. So, what do traders need to know to feel comfortable investing in the stock market?
#1 Don't Invest What You Can't Afford To Lose
This may seem straightforward enough, but it's crucial to keep in mind. Any time you invest in a stock, bond or other asset by purchasing it, you stand to lose all the money you invested.
As a result, any investor could land themselves in trouble by making moves that are overly risky. For example, this could happen by investing money needed for basic living expenses in hopes of generating compelling returns.
One good way for an aspiring investor to determine how much you can safely invest is to set up a budget, determine how much money you will need to live comfortably, set up a cushion of savings and then devote the remainder to investment.
#2 Do Your Own Research
Investors who are looking to start trading stocks can benefit from a simple adage: do your own research (DYOR). There are many different strategies stock traders can use, so you have quite a lot to research to do before making any investment decisions. At the same time, everyday investors can potentially outperform Wall Street professionals, making proper research that much more worth it.
#3 Set Up An Investment Account
Once thorough research has been performed, you can set up an investment account. You could also set up a brokerage account, which allows you to buy and sell stocks, generally in exchange for paying a commission.
There are many different kinds of service providers available, including full-service brokers and discount brokers. While the former may evaluate a client's financial situation and then recommend stocks, the latter is far more hands-off. This means that that they offer little advice and simply help their customers make transactions.
Some stock brokers are between these two extremes. As a result, they offer more information than discount brokers but provide less assistance to their clients than full-discount brokers.
Another option that aspiring stock traders have is setting up an account with a robo advisor. This is an online service that leverages technology such as algorithms to help its clients potentially build wealth. Many of these online services are inexpensive and charge fees between 0.25% and 0.89% per year. Plus, a lot of them require small amounts of money to get started, lowering the bar for participation.
If you get into trading, you should keep in mind that any fees you pay will reduce your returns, and you can potentially save hundreds of thousands of dollars over the span of your lifetime by avoiding high expenses.
#4 Start With Low-Risk Stocks
One good way to get started with stock trading is to focus on buying and selling stocks that are less risky. If you purchases share of a major company, you're less likely to lose the money you put in than if you bought shares of a penny stock.
Another way to reduce risk is to focus on the stocks of consumer staples companies, which are notorious for having low volatility. These businesses produce simple goods that everyone uses, such as food and soap. As a beginner stock traders, you may also consider shares of utility companies, as they have repeatedly experienced growth that is gradual, yet consistent.
#5 Stay Rational
The stock market is volatile, and members of the media may amplify whatever developments took place. If you let market news impact or sway your approach, it's easy to get stressed out. Even worse, you may let your emotions affect your investment decisions and potentially make choices that do not help you meet your objectives.
Investors who are new to trading stocks can benefit from creating a strategy and sticking to it. Whatever strategy you choose, you can benefit significantly from not letting yourself get thrown off-course by the latest news.
Historically, the stock market has offered traders some compelling returns. However, investors who are just starting out trading stocks can benefit significantly from keeping some basic things in mind. For starters, you should be sure to avoid investing any money you can't afford to lose.
Aside from that basic rule of thumb, you should also do your own due diligence not only on the stocks you're considering but also the entire stock market and economy. You'll also need to establish an investment account before you make any trades. Fortunately, there are many options available.
You may also consider sticking with options that come with less risk, as this will reduce the chances of suffering notable losses. Finally, you can benefit greatly from creating a plan and sticking to it, instead of getting bent out of shape by the latest market news.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…