Investing in the stock market can be profitable. But the perceived volatile nature of the market often makes beginners hesitant to navigate its waters. Understanding the basics of the market can go a long way in preparing a novice to make wise investments. Here, Mike Eisenga, a successful real estate and business investor, shares his insights into the stock market.
Buy Low, Sell High
This is not just a trite adage, it is the very essence of what makes the stock market profitable, but some new investors lose sight of this principle. While the methods and strategies can be complicated, the facts are simple. Look for investment opportunities that represent a value for their price – regardless of their price.
Don’t get sidetracked with trying to add high-status blue chips to your portfolio when all you really want in the end is to invest what you can reasonably afford in a stock that will grow in value over time. Emotional buying is a notable problem for novice investors. Without a clear understanding of the host of other factors that can affect a company’s value, buying a big name can seem safer. That’s not a well-thought-out strategy and could land a new investor in trouble.
There is Always Some Risk
All investment strategies include some risk. Essentially, when you make money in the stock market, what you get paid for is taking a risk. Generally, the stock market is a safe bet. Over time, the major indices will trend up. Any individual stock, on the other hand, can be riskier. That’s why mutual funds and other diversification strategies are a good choice.
Many types of risk affect the value of a company and, therefore, its stock. There is interest rate risk, commodity risk, currency risk, and a host of others. As a new investor, you will primarily be concerned with the financial risk of holding equity in a particular investment. This is called equity risk. Focus on understanding a potential investment’s equity risk; your mutual fund advisor can worry about most other risk factors.
Learn to Understand Public Filings
The Securities and Exchange Commission (SEC) requires all public companies to detail everything from company finances to potential conflicts and risk factors. As a new investor, learn to rely on SEC filings to make informed decisions when evaluating whether to invest in a company. They are your guide to evaluating the value of a company’s stock. Learn to read them and understand what they reveal. They are not tea leaves, but they can contain subtle clues. Time and experience will teach you how to read them effectively.
Keep a Long View
Taxes are one good reason that new investors should shun short-term trading. Another is the additional risk associated with inexperience. Many wealthy and seasoned investors indeed spend considerable time and effort in search of the next hot stock. Still, these investors are, in most cases, only playing with a small portion of their portfolio – not risking their life’s savings. Don’t risk what you can’t afford to lose and remember that the stock market is a great place to bolster your retirement nest egg but probably won’t let a new investor retire in five years.