Stocks are the most popular market, especially for beginners. Can you imagine that the first stock exchange was established in 1611 after the Dutch East India Company decided to go public and sell stocks?
Most newbie investors dream about Wall Street and picture themselves being Jordan Belfort, the wolf of Wall Street. This article won’t tell you how to become one of the most successful investors in the world, but it will guide you through key tips on how to start investing in a stock market.
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1. Learn the basics
Before you enter the stock market, you should distinguish between different stock instruments. You can invest in individual stocks or buy a share in an exchange-traded fund.
Individual stocks
Buying individual stocks is a complicated approach that requires lots of knowledge and time. To choose a stock with growth potential, you need to analyze numerous metrics, including balance sheets, income statements, and cash flow statements. As the stock price is correlated with the company’s earnings, it’s worth determining whether they will rise in the future. If the company isn’t very popular among investors, you will also need to analyze its business model. This may include unique brand identity, customers, product/service features, and suppliers.
Also, it’s vital to check the information about the company’s internal conditions. Moreover, you will need to evaluate the overall conditions of your company’s industry.
Exchange-traded funds
If individual stock analysis seems too complicated, you can invest in an exchange-traded fund that tracks the performance of a popular stock market index — for instance, the S&P 500.
Bear in mind: the index value depends on the performance of the included stocks. An ETF fund consists of the same stocks as the index. By investing in an ETF, you diversify your portfolio. To invest in an ETF, you can buy its shares on a stock exchange in the same way you buy individual stocks.
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2. Determine how much you can invest
Want to know how to start investing in the stock market? It’s vital to understand that investing requires significant funds. With just $100, you won’t be able to build a strong portfolio. At the same time, you must remember that investing is risky. Therefore, you should use only the capital you can afford. You may find numerous recommendations on how much money you must invest, but the only rule is to follow your own opportunities. Determine how important investing is for you and evaluate the real chances for earning profit.
3. Choose a broker or a trading platform
Although some companies sell shares directly, using a broker is the most common way to invest in stocks. It’s not difficult to open a brokerage account, but it may be challenging to choose the right broker.
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Don’t be fooled; you should check several brokerage ratings and read reviews. Still, remember that both positive and negative reviews can be fake. Therefore, this should be just a part of the overall broker analysis.
Another point you should consider is commissions and conditions. Compare several brokerage firms and choose the one that matches your expectations.
4. Pick stocks
After you know how much you can invest and what approach suits you best, you can start building your portfolio. If you decide to invest in individual stocks, you should keep in mind the following tips:
- Don’t put all your funds in one company. Don’t invest in a single asset, even if your analysis says it will skyrocket. The stock market is highly volatile. It’s hard to predict its direction. Therefore, you should invest in assets that aren’t correlated— for instance, companies from various industries.
- Invest only in industries you understand. For example, if you are interested in IT, do lots of research, understand how the industry works, and know its perspectives, you can invest in its companies. However, you shouldn’t invest in energy companies if you don’t know much about the energy sector.
- Measure stock volatility. High volatility bears additional risks. Therefore, you should avoid stocks with large price fluctuations if you don’t have sufficient experience.
- Avoid penny stocks. Penny stocks are stocks of small-cap companies that cost less than $5. Although they may attract you with their low price, they bring enormous risks.
How to start investing in the stock market for beginners
Before investing in the stock market, you must learn a lot. It’s vital to know all factors that can affect a stock value. Also, learning about the metrics that help forecast stock price direction is essential. Only after you fully understand the stock market’s mechanics can you start investing.
Sources:
https://www.nerdwallet.com/?trk=nw_gn_5.0, NerdWallet
https://fortune.com/recommends/article/how-to-start-investing/, Fortune
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