The March 2020 market meltdown brought millions of new investors to the stock market. This is always a positive development that needs more of a spotlight. The more, the merrier, as the saying goes.
For many novice investors, this can be an exciting time. There is no other thrill like buying your first stock and seeing a 0.15 percent gain the next day. The adrenaline rush is surprisingly addictive! But there will be days when that same stock will slump 0.35 percent, and your euphoria will dissipate.
The stock market offers many crucial lessons, from patience to due diligence to the importance of strategy. Can you succeed without falling for traps? It might take a couple of years of experience, but trust us when we say that the learning curve is worth it if you want to watch your money grow.
Here are four great ways to benefit from the stock market as a beginner:
1. Start Accruing Long-Term Income
One of the worst strategies to employ when you are starting out as an investor in the stock market is purchasing stocks that some meme creators have hyped up on an online forum. This will only end in pain (more on that later). The best tactic to utilize is honing in on valuable and worthwhile investments that will almost certainly generate income over time.
Whether you are looking to buy a 50-year-old retailer with a market capitalization of $250 billion, or want a business that has been reliable in paying out dividends, it is critical to initiate your investment journey on a high note. Would it be great to purchase a stock at a couple of bucks only for it to skyrocket to the moon by 1,000 percent? Yes, but the odds of that occurring are tremendously low. Instead, start by attaining stocks that have long-term potential.
2. Learn About Hype Stocks
The GameStop saga between Reddit’s Wall Street Bets forum and hedge funds was something for the ages. It contained various tales about market manipulation, power, and how much investing has changed thanks to social media. But the most important lesson could be that investors should refrain from pouring their life savings into trending stocks, like GameStop.
For someone just starting out, it could be a thrill of a lifetime to buy a hundred shares and see that stock climb 20 percent, 50 percent, or 500 percent in a few trading sessions. The hype forces you to keep adding to your positions, even though it is unlikely that the stock will mirror those gains. By the end of it, you’ve lost your profits, and now you’re in the red.
A lot of novice investors who got in the game will have endured a harsh punishment by buying something like GameStop or AMC at the top. Even the most principled of investors may struggle to resist the opportunity to potentially make some quick cash on a stock.
Here is a word of advice: sometimes sitting on the sidelines is the better long-term investment strategy. Stick to the fundamentals!
3. Choose an Investing Account
In the last couple of years, the investing account market has exploded, mainly due to the innovative contributions by the fintech industry. Today, the most prominent financial institutions have gotten in on the action by offering their clients zero commission accounts or a plethora of incentives to attract new clients.
Before you start purchasing your first stake in a company, be sure to explore your options, whether it is an all-in-one checking and investing account or a bare-bones account that only allows you to buy and sell stocks and exchange-traded funds (ETFs). Each of these products offers distinct benefits depending on your priorities as a new investor, whether its convenience, minimal fees, flexibility, independence, or fast growth!
4. Establish a Budget
One of the first things you need to do before you open an investing account is to divide your money into three categories:
- Cash you need in the short-term (up to three years).
- Money you need in the medium-term (three to five years).
- Funds you will not need for a while (more than five years).
After you separate this money, you will know how much capital you can play with in the stock market. Consider what Kevin O’Leary, recently said in an interview with CNBC:
“The bottom line is, we’ve got millions of new players in the market, and that’s always better. Even while you’re trading like a banshee on the side, never risk your nest egg. Always keep that protected.”
“So, I suggest to anybody that’s doing that [day trading], take 10% of any position that makes you money and it set aside for your long-term retirement in a different account that buys an index of funds or an index of stocks in an ETF.”
Put simply, start by setting aside $100 a week and stash it somewhere safe. Never touch your retirement nest egg, down payment for a house, line of credit, or student loans for a stock, especially as a beginner investor.
Investing can be one of the most exciting things you can ever participate in in your lifetime…but keep in mind that if’s too thrill-inducing, you’re probably trading in the stock market the wrong way. Legendary billionaire Warren Buffett had this to say about casino-like investing: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
When you are starting out, do not get caught up in the hype. Create a plan and stick to it during the bull and bear markets. If this is your primary strategy, you’re setting yourself up for long-term financial gains!