That’s because knowing the stock market’s pitfalls can make it easier to avoid them. “If you try to get into investing without knowing anything, there's big potential for mistakes,” says Linda García, stock-market expert and founder of financial-literacy platform In Luz We Trust.
Specifically, she says knowing and understand the correctly terminology of "stock market language" and being mindful not to make emotional decisions with your investments are important prerequisites. For instance, if you’re new to stock-market investing, you might sell all your shares the moment that you see they’re not yielding returns—which means that any long-term potential for earnings may be inadvertently thwarted. That's a no-no.
While knowing beginner tips for investing in the stock market are good to know because they reduce risk of losing money due to a lack of knowledge, it's crucial to understand that the market is not ever risk-free. But, armed with the right tips, you can be well on your way toward stronger financial wellness.
Keep reading to learn the four things that financial experts say folks should be aware of before putting any money in the stock market.
4 tips for beginners who are curious about investing in the stock market
1. Know that the stock market isn’t a get-rich-quick scheme
While the stock market is a tool that can make you money, the process doesn’t happen overnight—or anywhere close to overnight, for that matter. “Investing in the stock market requires a lot of patience, because it takes a lot of time to fully understand the market, but also to see your money grow,” says García.
“The thing that’s really going to allow your money to grow is time.” —Paco De Leon, finance expert
It’s important to internalize this reality, because if you’re looking for an immediate influx of money, the stock market isn’t the best place to find it. “The thing that’s really going to allow your money to grow is time,” says Paco De Leon, finance expert and author of Finance for the People. Your best strategy for building stock-market wealth, then, is to start investing as soon as possible (maybe after you finish reading this list?) in order to have the most time for your investments to yield returns.
2. Be aware (and wary) of meme stock culture
An equally great and dangerous aspect of the internet is how accessible it makes information to everyone, and the stock market is certainly included in that reality. A prime example of how this applies to the stock market is meme stocks, or companies that folks invest in just to drive up the value of the stock, but without any actual proof (like quarterly reports from the institution) that those companies are profitable, García says.
It’s crucial to be aware that these exist so that you don’t put funds where they won’t actually make you more money. When you’re a stock market newbie and all you’re seeing is the hype around certain stocks, you may not realize that these aren’t exactly savvy investments.
3. Determine how much money you have and are willing to risk
Different folks have different financial situations, which factors in to how much they’re comfortable investing. The stock market comes complete with highs and lows, so some days you’ll see your money grow, and other days you’ll see it shrink. For that reason, De Leon says it’s crucial for stock market beginners to designate a dollar amount that feels comfortable for them to risk (i.e., an amount they're essentially comfortable losing), is feasible on a regular basis, and isn’t currently allocated to be used for other purposes. Investment monies should come from funds that you aren’t counting on for anything else, says De Leon.
For example, if you have $2,000 stashed away in a savings account that’s specifically for emergencies, don’t tap into it as a stock market fund—that’s money you may need—in full and immediately—down the line. Again, the exact dollar amount a person invests will vary, so the best guiding rule is to be honest with yourself about what you can and can’t spend. (For the record, De Leon suggests putting in even $25 a month is better than not investing any funds at all.)
4. Understand what it means to diversify your investments
Imagine you’re at the grocery store and need to buy your food for the week. If your cart holds eggs, milk, produce, bread, and cleaning supplies, you’ve got a diverse cart. If, however, you find yourself at the cash register with 20 loaves of bread, you don’t have a diverse cart—even if they're all different brands of bread.
The stock market works similarly. It’s broken up into 11 different sectors, including information technology, health care, and communication services. A “diverse” portfolio (the stock market’s version of a grocery cart) should include stocks from at least a few different sectors, say De Leon and García.
How might a stock market beginner ensure that their portfolio is diverse? According to DeLeon, the best action plan is to purchase ETFs, or exchange-traded funds, which are like pooled investments that allow you to purchase fractions of companies that are in a given fund. To stick with the grocery example, De Leon says that an ETF is basically the equivalent of pooling your money with the people in the parking lot so all of you can get one of each of the items in the store.
Armed with those tips, do you feel empowered to invest? To help you implement the stock-market investing tips for beginners, you might also consider downloading investment apps to start you on your journey.
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