If you look at history, the stock market has outperformed bonds, treasury bills, gold, or cash. There are so many ways to invest in stocks. So, if you’re an absolute beginner, better check the following tips to know how to get started in the stock market.
Before you start investing, make sure you’ve studied your risk profile first. See whether you’re the type who’s willing to take on risks if it means getting something bigger.
Visualize how you would react to a 10% drop in the stock market. Try to know whether you’re the type who’s going to sell the stock in times of panic.
After you’ve considered those things, it will be easier for you to decide which investments will be better for you.
If you are not the type who’s comfortable with risks but you still want to invest in stocks, your best bet is mutual funds or index funds.
These funds are well-diversified and have a variety of stocks. This minimizes the risks, plus you don’t have to research individual stocks.
Commitment of Time
Are you only going to invest in funds, stocks, or a combination of both? This will depend on the amount of time you’re willing to devote on investing.
When you choose the mutual or index fund carefully, the hard work of selecting individual stocks will rest on the shoulders of the fund managers.
Meanwhile, investing in individual stocks is extremely time-consuming because it requires you to make judgements about management, future prospects, and earnings.
You want to distinguish between money-making stocks and financial disasters. You also need to know what they do, how they make their money, the risks, prospects, and many other factors.
So, you have to know how much time you are willing to spend in investing. Either way, investing is somewhat like a skill that really takes time to develop.
Don’t Forget Diversification
One of the golden rules of investing is to diversify. For example, you never want to put all your money in only one kind of companies.
Although the potential earnings can be high, there is also a high risk that you’ll lose everything once these stocks take a plunge.
The trick is to get diversified across several different sectors like real estate, consumer goods, commodities, insurance, and many others.
You can also diversify across asset classes by putting your money in cash and bonds instead of investing all your money in stocks.
Overall, investing more broadly will lessen the chances of losing all your investments at one time.
Building a Portfolio
If you are investing in individual stocks, you can pick 12 to 20 well-chosen stocks, and that should be enough to make your portfolio well-diversified. That number is also not very overwhelming you with too many companies to track.
On the other hand, you will have to ensure that you fully know each company, learning about its business model to the risks it is taking in the industry.
Now, if you think you’re short on time or willingness to pick a number of stocks, you may invest in a combination of index funds and individual stocks.
Also, for those who are starting with limited amount of capital, investing in 12 to 20 stocks may not be possible.
So, investing your money in funds would provide the stable that they usually generate.