We already looked at how the stock market works. Now I wanted to get into some tips that you should consider following if you choose to invest your money in the stock market in the near future. I don’t want you to go broke. I also don’t want to tell you what to do. I just want to give you the resources and information to help you have more money.
I was looking through Generation Earn the other day and I was reminded of a few basic stock market tips. What are five stock market rules to live by?
Diversify your investments.
It’s important that you diversify because you don’t want to lose all of your money when the one stock that you put all of your money into crashes. By diversifying your investments you can buy shares in different companies, considering other investment opportunities (mutual funds for example), and hold some cash in more liquid options.
If you do decide to invest in the stock market in your 20s, it’s important that you protect yourself. By diversifying where you keep your money, you’ll be be able to still take some chances without completely risking your savings.
Pay as little as you can with expenses.
The thing with buying and selling stocks is that you have to pay a transaction fee every time. If you decide to be a day trader, you’re going to find yourself dealing with lots of trades from all of the buying and selling. You’re also going to have to pay expenses if you choose to invest your money into actively managed mutual funds. As a young investor you should strive to pay as little as possible towards these expenses.
You can also sign up for some sort of a discount brokerage with your local bank or likely wherever you do your normal banking. I just recommend that you get your money’s worth and don’t spend too much on expenses here.
Use the power of compound interest by starting early.
While the stock market itself isn’t always the greatest investment, it does make sense to start investing your money in any way that you can in your 20s. The obvious reason is that you’re going to have the power of compound interest on your side. The younger that you start, the earlier that you’ll have compound interest working for you. This is why I write on Studenomics and try to promote the idea of managing your money at an early age.
Don’t even try to time the stock market.
When I first got into investing in the stock market, I thought that I could time the market. It just doesn’t happen. I learned this the hard way when I lost the little bit of money that I had in high school by investing in some gold stock. I’ve also heard from a few friends in the past about how they lost money by trying to time the market. It’s really common to lose money by trying to be too clever and timing the market. I eventually stopped investing in the stock market and went more towards traveling and real estate. You might end up making a fortune by timing the market. You could also go broke.
Accept that high rewards come with high risks.
One of the stock market basics that I’ve covered in the past is that high rewards come with high risks. If you’re going to try to play the stock market, you need to realize that you might get lucky the occasional time and win big. There’s also going to be many times where your big risk will lead to a big fat zero. You can double your money. You can also lose all of your money. I recommend always considering the worse case scenario. This is why most financial advisors promote the idea of having a loss-limit at which share price that you need to absolutely sell all of your stocks before you lose all of your money.
Those are the best tips that I found for those of you that want to start investing into stocks without going broke. Have you ever tried to play the stock market?
2 thoughts on “5 Stock Market Rules to Live by”
I would also recommend to young investors: don’t overlook dividend paying stocks (with yields of 4%+), they pay you quarterly to own the stock, so even if it goes nowhere in price, you get paid to wait. Another thing I have found essential (as a 20 year old investor) is to determine your tolerance for risk as soon as possible. This will help you gauge how much risk to take before investing. Unfortunately, you don’t often know your tolerance for risk UNTIL you invest, so tread carefully. I would advise first time investors with less than $1000 to invest to look into diversified, no-load (no transaction fees to buy and sell) ETF or mutual fund that aligns itself with either the DOW or the S&P 500. You can find these that pay dividends too, something I’d advise. I don’t want to give specific recommendations, but this should give readers a place to start. I recommend seekingalpha.com and investopedia.com as vast sources of knowledge for investors (start at investopedia, seeking alpha once you have some experience). I feel obligated to mention DON”T INVEST IN PENNY STOCKS, while the idea that your money could double if a stock goes from $0.01 to $0.02, this rarely happens for most people, there’s a reason the OTCBB (the market penny stocks are usually traded on) is priced out to the $0.00000 increments.
While some people you talk to will say “you can afford to go ask risky as possible, you’re young” you aren’t doing yourself a favor if you invest in something “Very High Risk” then sell once it loses 50% of its value, even if it then rises to many times your initial investment; you have locked in your losses when you sold. This all relates to risk tolerance.
Thanks for this detailed comment David.
You made me laugh with your excellent point on risk tolerance. What we think we can handle and what we can actually handle can be far apart. It’s easy to take risks in theory. In reality you might pull your hair out seeing your stocks dip.
Ditto on the penny stocks. I know this older dude who swears by penny stocks. He’s still waiting for that five cent stock to go to a buck.