Personal Finance

6 Things You Need To Know Before Investing In The Stock Market

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The stock market has become a common term in the investment world. Every day there is a story of an investor who made it rich through buying shares low and selling them at a higher price.

stock market

This public narrative has driven many people to engage in the trade with the expectation of striking it rich as well. Hypothetically, this is possible but it requires more than just mere public stories to become a successful stocks investor.

The majority of investors in the stock market end up losing their money but this is never told.  Either way, this doesn’t mean that you cannot become a successful investor.

There are a few things that you need to understand before you can do so. In this article, I discuss some of the tips which are necessary to know and have before you can become a successful stock market investor. 

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Market knowledge

The basis of any investment decision is having the knowledge of the target market. The stock market is no different. Share price movement is highly influenced by the day to day events such as economic events, climatic events, and political events.

As a stock market investor, you always have to be in touch with the current events to understand the potential direction of the market. Lack of knowledge results in blind trading making it more of gambling rather than investment.

Knowledge in stock market investment gives a better understanding of when to buy or sell. As a stock investor, you are buying into ownership of a specific company.

So before committing your funds, you need to carry out adequate research on the business you are buying into. This ensures you have enough knowledge of the nature of the business, past performances, and leadership.

By doing this, you are able to evaluate the business viability and future potential. A good example is having to make an investment decision between a fossil fuel company and a green energy company.

In the current environment, countries are pushing to move from fossil fuels to green energy. So the fossil fuel company might not be as lucrative and the green energy company.

One has a clear future while the other one does not. This makes one thing clear, investment in knowledge is one of the most critical steps towards becoming a successful stocks trader.

Broker

Trading in stocks involves a third party called the broker. Brokers offer the platform where buyers and sellers meet making it critical to choose your broker carefully.

Other than connecting buyers and sellers, brokers also offer services like training, investment advice, and leverage. It is also necessary to understand your broker’s margin (the cost of trading) the commission that a broker makes for every trade that you make.

Choosing a broker with high margins makes it very expensive for you to trade thus not advisable. A good broker should offer you enough market knowledge regularly to ensure you are always updated.

Another key aspect to check from a broker is the number of stocks in their portfolio. A good broker should offer you a choice by ensuring there are many stocks that you can invest in making it possible for diversification.

Finally, the broker should also be regulated. It means they are operating within the law and in case of any shortcomings, you can seek legal solutions.

Risk tolerance

Investment is a risk-based activity. There is always a chance that you could lose your money. Actually all of it. Buying a stock means you are acquiring a company’s ownership herein accepting the risks if it fails.

Due to this fact, it is always advisable to always invest what you are willing to lose. As a general rule, risk correlates with the returns and the losses.

So before you take on a share investing journey, it is prudent to clearly determine your acceptable risk level. As a beginner in the stock market, I suggest you take risks conservatively because you are bound to make a lot of mistakes.

As you get more experience and become a better trader, then you can widen your risk tolerance. Risk can be determined on many fronts.

This includes the number of funds you are willing to trade with, the types of shares you are investing in, and the amount of leverage. Any amount of money you trade can be lost.

Hence, it is advisable not to use all your bullets just in case things do not go as planned. You will still have another chance to make an attempt.

The type of shares you are trading is based on the company’s nature. There are shares that are very volatile in nature meaning their price keeps fluctuating both to the downside and upside.

This volatility could be highly rewarding but needs experience because it could also be very punishing. As a beginner, it is advisable to keep away from these stocks until you have enough market knowledge and experience.

Leverage is the amount of borrowed funds that your broker gives you to trade more. Highly leveraged traders could lose more if the market doesn’t go their way. Hence use small leverage or avoid it if you are still not experienced.

Diversification

This is the art of investing in different types of stocks from different types of companies so as to achieve some aspect of hedging.

This is driven by the fact that unrelated business shares behave differently. Their gains or losses are not driven by the same conditions most of the time. That is typically how the stock market works.

Using my earlier example, an investor could buy both Fossil Fuel Company and green energy company shares. This means that at any time there will still be relevant in the investment.

Another form of diversification is investing in shares of companies in different business areas. A case example is investing in a financial company, an agricultural company, and a manufacturing company.

These are different sectors with unrelated economic activities. Diversification minimizes the risk of having all your investments fail at the same time.

This doesn’t mean that they can all fail, however, it reduces the chances of that happening. Embracing diversification while trading stocks is one way to ensure your investments are hedged.

Patience

Investment in stock needs a lot of patience for tangible gains to be realized. This makes it a long-term investment option. The key reason for buying shares is the expectation that they will rise in value resulting in a profit on the investment.

This process is not a one-day affair. It may take years or decades to achieve. This means that investing in shares is not a get-rich-quick scheme.

Before you engage in it, ensure you are ready to go all the way and to have your funds tied for a long time. Occasionally, the share companies pay dividends ensuring that you are making regular earnings.

Combined, these dividends tend to be sizeable over time. They say that patience is a virtue but in share trading it is king. Learn it and you will become successful.

Investment Strategy

Lastly, as an investor, it is necessary to have an investment strategy. A detailed plan that includes all that will be involved in your investment journey.

It includes the amount of money to trade with, acceptable loss level, amount of leverage to use, types of shares to trade, and finally the broker to use.

These are just a few of the contents of a good trading strategy. A strategy ensures you are investing in a structured and systematic way. It eliminates guesswork, confusion, and emotional trading.

Serious businesses operate with strategies. This guides the organizational structure and direction. Hence, a serious investor in the stock market must have a strategy as well.

In the beginning, the strategy might not be very clear because one is not sure of what really works. However, over time as things get clearer, it becomes easier to have a more realistic and profitable strategy.

Investing in the stock market can be a very involving undertaking.  It requires a lot of hours in gaining knowledge, meticulous planning, and persistence to succeed.

It needs hard work and patience for long-term gain. I know one if not all of these tips will make you a better investor. Have you ever tried investing in the stock market? Let me know in the comment section below.

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