Tips to Invest in the Stock Market
These tips can help beginners avoid mistakes in the stock market and help more experienced investors improve their trading results.
However, I must insert the disclaimer that everything written below is a concentration of my experience in the stock market as an investor and is not individual investment advice, as it will not work for everyone.
Have an investing strategy and stick to it.
A strategy is an investor’s roadmap without which it is dangerous to begin your journey in the stock market. Before you invest your first money, decide on your investment profile, opportunities, and conditions, investment goals and horizon, tactics, and strategy.
Invest only in what you understand.
If you’re too lazy to understand the business that issued the security, it’s better to forgo self-investment in favor of other options. If something seems too complicated, someone may be trying to confuse you, or the asset just isn’t right for you.
Think of buying a stock as buying a stake in a business.
Remember what a share is in its essence – security that gives its owner the right to participate in the management of the company and distribute a portion of the profits based on performance. Think like an owner and don’t forget the businesses behind the stock in your portfolio.
Treat the process of investing responsibly.
There are many professionals with vast experience on the stock exchange, and their goal is to make money, including on the stupidity, naivety, greed, and incompetence of other participants.
Invest in yourself / educate yourself.
The science of investing covers a wide range of fields and interests, from philosophy, psychology, and history to geology, chemistry, and mathematics. A good investor is a researcher who simply cannot afford to have a narrow mindset. So if you are on this path, be prepared to regularly invest time and money in your own education.
Invest only your own money.
This is especially important if you have not yet learned to objectively assess the risks. Working without the use of borrowed funds, and it can allow you to avoid many dangers and worries, and with proper diversification practically reduce to zero the risk of losing the deposit on the brokerage account.
Remember about diversification.
Don’t put all your eggs in one basket – one of the most popular financial recommendations, and that’s because it works great. Control not only the number of issuers in the portfolio but also the size of their stakes and the dependence of the issuers on one or more factors. For example, a portfolio cannot be considered well diversified if a significant portion of its constituent companies belong to the same holding company, belong to the same economic industry, or produce similar products in a common market.
Be realistic about possible profits.
The main task that the stock market can help an investor is to move capital over time and protect it from the ravages of inflation. Do not expect quick super-profits from working in the stock market, especially if you are focused on a long-term strategy and do not have the gift of predicting the future.
Invest only money that your family can afford to lose.
The stock market can be a great place to invest “surplus” funds, but it’s a big mistake to put the money you need for current consumption and on which your family’s well-being depends. The more independent your capital is from outside non-market factors, the less likely you are to have to sell off your stock portfolio in a hurry at the worst possible prices.
Don’t lose money.
This is the cardinal rule from the world’s most famous investor, Warren Buffett. And his second rule: “Never forget the first rule. Be prepared for losses at any time, because investing is a risk. But do your best to keep it to a minimum.
Make trades without emotion.
Emotions are the worst and most dangerous enemy of the investor. Many mistakes in the stock market are caused by the fact that the investor could not control them, and evaluated the situation incorrectly. If you feel overwhelmed or agitated, it is better to close the terminal and return to trading when you are calm and able to think soberly and without prejudice.
Watch your expenses and trade less frequently.
Work not only to increase income but also to control expenses, without this, working in the stock market is like trying to move water in a sieve. Minimize and optimize your expenses, don’t trade if it doesn’t make economic sense, and make sure taxes and commissions don’t eat up the lion’s share of profits.
Always verify the information.
In the age of the Internet, it has become easier to get information than ever before in the history of mankind. But there is a downside to this: the amount of fakes and falsehoods exceeds the amount of valuable and objective information. If you see information that could affect your valuation of an asset, go to the source and make sure the data is current, true, and not taken out of context.
Realistically estimate the value of the business.
Estimating the fair value of an asset is an important and difficult task for an investor. Try to adequately assess the extent to which market quotes reflect the company’s reality and future prospects.
Have a different approach for different types of companies.
If you try to evaluate all companies according to one mold, you might miss something important. Therefore, an individual approach to each issuer is preferable. Try to understand what kind of business is behind a particular stock. Is it a startup that is willing to suffer losses to capture market share or a commodity cyclical company? Is it a profitable asset that has limited room to grow financially but pays dividends, or a growing company that pays nothing yet but has a double-digit growth rate in operating income over the past five years? Different types of companies are suitable for investors with different investment tactics and strategies.
Trust your own analysis, be bolder in going against the trend or the opinion of the crowd.
Have your own opinion and be prepared to go against the trend and market consensus if your analysis goes against the general consensus. In the short term, liquidity rules the stock market, and what most people buy will grow, but over the long term, speculative volatility is usually trumped by fundamentals.
Stop trying to guess price lows and highs.
If someone could reliably determine where market prices will be in the future, they would have taken over the world long ago. But luckily, that’s impossible. So don’t play a “guessing game,” put aside the crystal ball, and get on with more pressing matters.
Avoid gambling on the stock market.
The stock market really can be treated like a casino: You can bet and have the fun gambling with your own or, more dangerously, someone else’s money. But it is much wiser to use the stock market for its intended purpose – as a platform, where you can place capital invaluable assets for the sake of future returns.
Filter the flow of information.
One of the most common mistakes of the novice investor is to constantly monitor the information flow, thinking that it will improve the outcome. Unfortunately, most news is garbage and only distracts or confuses. Learn to filter incoming information so you don’t drown in its flood and waste precious time.
Evaluate the results over a long time frame.
If you did something on the stock market, don’t check its effectiveness the very next day, week, or month later. That is too short a time frame to draw objective conclusions on which to change tactics and strategy. Many issuers take years to reach their potential, and a drop or rise in a short period of time does not mean you were right or wrong.
Patience is the first thing an investor must learn. Be prepared that your expectations will often diverge from reality. The market can be irrational longer than an investor is a solvent, so don’t bet on some future event risking your existing portfolio. On the other hand, don’t rush to sell a good asset if its price isn’t going up. Excessive fuss prevents long-term investors from making money in the stock market, and patience based on fundamental knowledge is often rewarded.
Treat your investments with an open mind.
Avoid internal attachment to the securities that make up your portfolio. If the performance of the business relative to the market price no longer satisfies your chosen strategy, take another hard look at everything and, if the assessment is correct, get rid of the issuer’s shares without regret.
Remember that stock market crises are common.
At least once in a decade, a major crisis occurs in the stock market and a significant drop in the stock price of 20-70%, and the correction of indices by 5-15% is an almost annual occurrence. Be prepared for this and do not be afraid. Sooner or later, if the businesses behind the securities continue to operate and grow profits, quotes will recover.
Monitor your portfolio.
Keep records of your investment activity and analyze your performance. Without this, stock market trading can turn into a chaotic buying and selling process, without understanding the underlying reasons and consequences of a particular decision.
Invest to live, not live to invest.
Life is happening right now as we make our plans. Securing your financial well-being for the future through investment is important, but it should not replace or put off the rest of your life.