While many people sit and daydream about becoming rich beyond their wildest dreams from a big lottery win, or a strange unexplained windfall, others amongst us carefully play a fiscally rewarding investment plan. And, while the terms investments or investing can seem like a daunting prospect for many, once you get the hang of it, you can make a little back here and there or opt to go for the long-term investments. Many people think you need to have a real ‘mathematical’ brain to get started, but the truth according to Peter Lynch is “If you can make it through fifth-grade math, you can do it.”
Let’s get started then.
If you aren’t confident enough to start plunging your cash into anything just yet, then don’t. You can create your own paper stocks. Pick a few companies that you like the sound of, or that you might’ve read ‘do well’ on the stock market and put some pretend money in there. Allocate $500 (imaginary) to each investment and track it for a few weeks. Start to learn what global issues and policies might make an impact, begin trying to predict if it will go up or down. And, even though there is no money here, don’t be tempted to lie to yourself about it. You’re learning as you go and getting it wrong is a part of that process. You can also use an automated trading platform to help you get to grips with it if you simply don’t want to wait and are ready to dive straight in.
Things you should make an effort to learn:
Stock Market Order Types: Learn the difference between limit order, stop market order, stop limit orders, market orders, and other common types.
Investment Accounts: Margin accounts, cash accounts and how they are regulated. What is the difference between maintenance and initial margin requirements?
Financial Metrics and Definitions: P/E Ratio, EPS, ROE, CAGR – get to know them and learn how they are calculated.
Once you have a grip (doesn’t have to be firm) on what you will be doing, start thinking about your long terms goals. If you are investing, when will you need or want that cash back? Is it a short six months flip? What about five years? Longer maybe? Perhaps your goal is to retire with a nice lump sum for traveling.
Before you start plowing money into anything, having a clear goal will help you focus. There are specific points in our lives that we tend to need more substantial lump sums, retirement, when the kids go off to college are two of the main ones. Really, you should look to start saving as soon as possible in life. Even small amounts make a difference.
Learn about your own risk tolerance. This is a psychological trait, it is genetically based but can be influenced by income, wealth, and education. As each of those factors increases, so does our natural risk tolerance. In basic terms, your risk tolerance is how you feel about risk in general and also the degree of anxiety you feel when there is risk present. As your knowledge (education) in investments and how the stock market work goes up, your attitude to risk will change. You will be more likely to take what we tend to call ‘calculated risks.’
Don’t make financial decisions based on your emotions. It is all too easy to pull money out of funds too early to help someone, or to move your money because you are following the “bears.” In investment terms, a “bear” is a person that has negative feelings towards a market, and a “bull” is someone who feels positive. A substantial shift in what bulls and bears are feeling will show on the market on a daily basis. In fact, a large group of either can drive the price up or down by a fairly significant margin. However, these movements are motivated purely by emotions, and while it might be tempting to follow those who have a ‘gut feeling,’ you need solid evidence and fact to make investments. When you buy stocks, you need to have a good reason for doing so.
Have an exit strategy. When you started way back when with your paper stocks, there was probably point that you decided to pull out of that stock and invest in another. You’re going to need to have the same awareness, if not more to judge when to liquidate your holdings.
“Risk comes from not knowing what you are doing.” – Warren Buffett.