The world of stock market investing is a difficult, complicated, but tremendously rewarding one. If you don’t know your way around, you’re bound to suffer from the consequences. But if you know what you’re doing, you’re certain to reap the rewards in the end. With that said, here are 5 stock market tips you can learn from the pros.
1. Master the basics
Before you dive into all the intricacies of stock market investing, it’s important to familiarize yourself with the basics first.
“You start by learning the five components, mastering them, and then sticking with what works,” says Danielle Shay, director of options trading and new trader specialist at Simpler Trading. According to Shay, the five components that new traders need to learn and master are setup, strategy, entry, stop, and profit target.
Setup refers to the patterns that already exist in stock market trading. This is the reason why you’re pushing through with the trade. Strategy refers to the way that you trade the setup. You need to find the best strategy that works for you if you want to succeed in stock market trading. Entry refers to the point where you decide to enter the trade. Is the stock doing well? Do you see more opportunities for it in the future? Stop refers to the point that you have to stop buying new shares of a specific stock. You can’t just keep going and going, or else you might lose out on a lot. Lastly, profit target refers to how much you’re planning or expecting to make from a trade. Once you reach this target, only then can you sell your shares.
2. Have a plan
Stock market investing is a long game. While it’s also possible to see profits in just a short amount of time, long-term investing is still the real wealth-builder.
That’s David Rae, president of DRM Wealth Management, emphasizes the importance of having a plan, not just for the next 5 years or so, but also for the next, say, 20 years.
“When investing in the stock market, you have to think long term,” Rae says, “and avoid the temptation to check your portfolio several times per day.”
Rae says that checking in on your investments often will just “waste your time, stress you out, and increase the odds that you will make a big mistake and sell at the wrong time.”
3. Know your risk appetite
Not all of us have the same risk appetite. Some people are fine seeing their investments in the red on the daily, as long as there’s still some hope of a brighter future for their stock picks. Others, however, cannot bear a slight dip in the market even just for a few days.
Before you invest, it’s very important to know how risky you are willing to be. How much risk are you willing to take? Are you willing to possibly sustain huge losses while also betting for huge gains?
Dave Ramsey, popular finance speaker and best-selling non-fiction author says that determining your risk appetite is a must before picking out your specific investments.
“If investing in single stocks may be too risky for you, consider investing in good growth stock mutual funds,” Ramsey says. “Mutual funds are a simple, even boring, investment plan, yet they work well for most people.”
4. Diversify your portfolio
Warren Buffet is often lauded as the world’s greatest stock investor, and with a net worth of over $80 billion, that’s rather hard to contest.
But despite his vast wealth and experience, the Berkshire Hathaway chairman and CEO still believes in diversifying one’s portfolio.
“You want to spread the risk as far as the specific companies you’re in by owning a diversified group,” Buffett says in a 2017 interview. “and you diversify over time by buying this month, next month, the year after, the year after, the year after.”
Simply put, by diversifying your stock picks, you’re lessening the risk of losing too much in one go.
5. Use your head, not your heart
One of the most important advice to stock market beginners is this: don’t ever let your emotions dictate your investments.
It’s not unusual to hear beginner traders unable to sell a certain stock because they’re feeling sentimental about it. Maybe it was the first stock they ever bought, or maybe the company meant something to them. Meanwhile, some traders get so scared during dips that they sell off their shares immediately without even waiting for an outcome, therefore making what was just a paper loss a real loss.
Of course, it’s impossible to completely distance yourself from your emotions, but emotions simply have no place in the stock market. Always remember to use your head, not your heart, and you’ll just be fine.