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Stock Market For Newbies: 8 Tips You Should Know

Looking for long-term financial stability? Investing in the stock market is a very good move. However, you should never dive into it without a strategy. If you don’t know how to start, check out these 8 tips.

1. Choose your investments wisely

When it comes time to make an investment, choose carefully. Don’t make a decision simply because a company is well-known or sells products you like. While there is a temptation to judge a stock based on past performance, the truth, if that is all that mattered everybody would be rich. What a stock has done in the past has no bearing on how it will do in the future. Instead, you want to master the art of predicting future prices. This doesn’t guarantee you’ll make money, but if you are good at analyzing companies and their fundamentals — in particular earnings per share or a price-earnings ratio – it gives you a better idea about which stocks to invest in versus buying blindly. You also shouldn’t invest simply because you like a company’s products.

2. Avoid individual stocks if you’re new to investing

People often get into investing after they’ve heard about a particular stock skyrocketing in price. Who doesn’t wish they had invested in Game Stop when the price was under $4, only to shoot up to $325 within 6 months? Such gains are extremely unrealistic. Plus, people who brag about finding a stock that has performed well conveniently forget to mention all of the stocks they bought that did poorly. Instead, you should invest in index funds, such as a mutual fund or an exchange-traded fund (ETF). These consist of dozens or even hundreds of stocks.

3. Create a diversified portfolio

Instead of buying an individual stock in an oil company, the better option is to buy a fund that focuses on the entire oil industry. That way, if the entire industry is doing well as a whole, the individual performance of a single company doesn’t matter. You can even take things a step further by buying a broadly diversified fund that covers a huge range of industries so that if one is experiencing a slump, the success of other sectors of the economy makes up for this. In fact, it’s possible to buy the S&P 500 index fund, which contains every company on their stock exchange list! By focusing on a diversified portfolio, you never have to worry about putting all of your eggs in one basket.

4. Understand that the market ebbs and flows

The market moves up and down like a rollercoaster. When the economy heats up, it is bound to lead to sell-offs. But don’t panic. Inexperienced investors have a tendency to panic sell when the price drops, but then buy only after the stock has returned to higher levels. Just be patient and look at your investments from a long-term perspective. This is yet another reason why you should consider index funds rather than individual stocks. Historically speaking, the stock market has always made gains over time even if individual companies never return to all-time highs.

5. Try a stock market simulator before investing real money

Want to test out your stock trading prowess before actually investing money? Stock simulators with virtual dollars allow you to see how you would do in real life, but without any of the actual risk. It will also allow you to determine how you would respond to gains and losses before you take the plunge. You might just come away humbled, which is a good thing since it will dispel the belief that you know more about the stock market than everybody else.

6. Avoid short-term trading

Unless you have extensive experience with investing, short-term and day trading are almost always going to lose you money. After all, you’re competing against the most skilled investors who are using the most powerful computers.

7. Think long-term

Look at your portfolio on an infrequent basis. It’s understandable that newbie investors might be curious and even enthusiastic about keeping up with the daily news cycle. However, this is not a good idea since it can quickly turn into an obsession and cause a lot of stress. Stay focused on the big picture: the purpose of your portfolio is to gain money over time, so short-term performance is irrelevant.

8. Start today

There is no “best time” to jump into the stock market. Even in an economic downturn, nobody knows where the bottom is. But in any event, as previously stated, investing is a long-term activity anyway. So starting today is perfectly fine.

Bottom line

Putting money into the stock market can be satisfying, especially if you avoid the mistakes that inexperienced investors make. Develop a long term plan and stay the course no matter how the market is performing.