Often, new investors get frustrated easily as they see their hopes dashed and their savings dwindled. While there will always be a degree of risk involved in investing, learning more about the stock market and employing suggestions from seasoned investors can help you reduce that risk. These tips will help you improve your investing strategy and you'll be more likely to grow your savings.
Don't Follow Your Heart
The single most common mistake new investors make is to let their emotions influence their investing decisions. This is so commonplace that Warren Buffet, who is one of the most successful investors in recent history, advises against it frequently. He warns that any investment decision should be made with the mind and only after thorough research. By informing yourself about the stock and its potential for growth, you'll be better prepared to invest.
Don't Sell in a Panic
The first part of this equation, of course, is to only buy stocks that you believe will increase in value. Some new investors simply look for cheap stocks, thinking their value must increase over time. When that stock drops even lower, they get nervous and sell their shares at a loss. However, by investing in stocks that seem promising and holding onto them through a downturn, you can avoid that type of loss. Instead of selling just because the price has dropped, watch for changes in that business' infrastructure. A merger, a change in leadership, or a lawsuit might be better reasons to sell your stock shares.
Don't Expect a Quick Cash Grab
While some people do make a career out of day trading, most people lose their savings in an attempt to make a lot of money in a short time. Instead, you should be buying quality stocks, which you plan to hold onto for a longer period of time. For instance, some financial experts suggest you can expect a 7% annual return on blue chip stocks, but this requires holding onto them for several years. Additionally, you may only earn 2% one year or 4% in another year. Patience is an important trait to possess for any investor.
Know How Much You Can Afford to Risk
While optionsanimal and similar services can give you a better springboard for investing, you should also take the time to evaluate how much you can afford to lose. If the idea of losing $1,000 makes you anxious, you may opt to invest a little less in each stock you buy. Similarly, you don't want to invest everything in one stock only to end up losing it all. It's better to divide your investments among multiple stocks and to choose investments that inspire your confidence. If you have strong misgivings about a certain stock, don't buy it.
One of the most basic methods of reducing risk is avoiding paying prices that make no sense for a stock. Scott McNealy, the CEO of the tech darling in the dot.com bubble gave a famous and very simple guideline around what is "too expensive." McNealy explained why his company, Sun Microsystems was overvalued in 2000. The explanation makes simple work of valuation.
Follow the Market Regularly
There's a good reason you should look at the stock market page in your newspaper every day. This will help familiarize you with the market indexes, so you'll be able to see when the market is on a rise. An upward trend is the optimum time to buy, but you won't recognize it from an occasional glance. Watching the market rise and fall will help you develop a skill for investing at just the right time.
Diversify, Diversify, Diversify
You've probably heard the warning about keeping all of your eggs in one basket and that adage is best applied to investing. If you invest everything into one or two stocks, you run the risk of losing it all in one bad turn. However, investing in a wide range of stocks within different sectors can help you build a buffer against loss. This is the best way to ensure you'll continue to grow your savings over time.
Like any other activity, investing in the stock market will require learning about the process and how to interpret the market's activity. That will take time and may require watching the market for a period before sinking your money into any stock. Since your goal is to build up wealth for a vacation, home, or your retirement, you don't want to make spontaneous decisions that will unnecessarily risk your savings. Instead, educate yourself and reduce your risks of loss.