Anyone can make a small fortune in the stock market. All you have to do is start.
1. Determine where you are financially Find your net worth by adding up all of your assets and subtracting all of your debt obligations. Develop a budget by listing all of your monthly income and all of your monthly expenses. These two steps will tell you how much money you have available for investing.
Before you make your first investment in the stock market, sit down and do an honest self-assessment. Determine how you relate to money and how much risk you feel comfortable taking. The best stock market investment in the world does you no good if you can’t sleep at night worrying whether it will lose money.
2. Determine where you want to end up financially A sk yourself specific questions and write down specific answers. At what age do you want to retire? How much money will you need to retire comfortably? How much time do you have between now and then? How much money do you have to work with? How much risk are you comfortable taking?
Once you know the answers to these questions you will have a good idea of how much you need to invest to reach your goals. If you don’t care where you end up, any road will get you there. It’s the same with your investments.
You must know where you want to end up financially before you decide about the proper investment to achieve that end. If the result is a positive number, you have disposable income that you can use to invest in the stock market.
3. Research, open a brokerage account and start Most stocks are traded through major investment exchanges or over-the-counter. There are two primary routes you can take when it comes to investing in the stock market.
You can use a full service broker who will make investment recommendations based on your needs and desires, or you can use a discount or online broker that will execute your orders but will provide little or no advice.
Discount brokers are less expensive, but provide fewer services. A third option is to invest in mutual funds, which provide both diversification and professional management, but even this option requires research. Remember, most mutual funds don’t beat the averages.
4. Invest regularly Investing a set amount on a regular basis provides a benefit known as dollar cost averaging. This means when the market is high you will purchase fewer shares. When the market is low you will get a greater number of shares.
By investing a set amount of money each month, rather than purchasing a specific number of shares of stock each month, the average cost per share will be lower.
5. Cut your losses You typically buy a stock because you believe it is going to increase in price. The problem is, you are probably buying it from someone who is equally convinced the price is going down.
The reality of investing is, the market will fluctuate. Some stocks go up, some go down, some go up and down. Some investors make money while others lose. In order to create wealth in the stock market you cannot become emotionally attached to a particular stock.
Always set a stop-loss price at the amount you are willing to lose, and get rid of the stock if it falls below that level.
6. Diversify Your Investments The bedrock of investment advice is, “Don’t put all your eggs in one basket.” In other words, diversify your stock holdings, so if one stock craters you don’t lose all your money. There is no better long-term risk management strategy than diversification.
7. Don’t Marry Your Stocks It can be easy to get emotionally attached to a particular stock, especially if that stock has done well for you over a number of years. But there might come a time when it is advisable to sell that stock, either to lock in a gain or to cut your losses.
8. Get Started, Don’t Stop Investing in the stock market is a lot like driving on ice. The best advice is to get started and don’t stop. Time is your greatest ally or your biggest enemy. The sooner you get started, the more wealth you can accumulate, but it takes time.
Investors who consistently invest in the stock market and are willing to leave their money in the market for long periods of time — 15 years or longer— tend to earn strong, positive returns.