Investing in stocks is a hard skill to master. Many of the terms used can seem like a different language from a different planet. Terms like “diluted eps” and “price-spread” can make investing seem too complicated. Strategies can vary from extremely complex to incredibly simple. With thousands of books and millions of videos, it can seem impossible to learn. But, if properly broken down, investing can be made simple and profitable for everyone.
There are many incorrect ways to invest that are passed around the internet today and if you follow these strategies it will lead to a huge loss or even a total loss of your money. No one likes to lose money. So I will tell you how to get started and what strategies to avoid when first starting to invest.
Understanding the Basics of Investing in Stocks
All public companies (companies which “shares” are open to the public for purchase) have a ticker (Apple: AAPL) and all companies reside under an exchange. If your American, every company that you can think of is either in the NASDAQ or the NYSE exchanges. You can find your country’s exchanges here. Most exchanges are open every weekday and have their own open and close times. Some exchanges are even closed for a few hours to give a break for lunch.
When people refer to a market being up they are typically referring to an index. Many markets’ performance is tracked using these indexes. The Dow Jones and the S&P 500 are just a couple of indexes and there are countless more. You can also invest in these indexes using ETFs (exchange-traded-funds) through any brokerage.
To buy a share of a company or ETF you must do so through a brokerage. Companies like ETRADE and TDAMERITRADE are two great companies to purchase shares through. However, these companies have fees for every trade (the purchase or sale of a number of shares) you make. There are a few companies now which are growing at an incredibly fast rate which do not charge any fees. ROBINHOOD is probably the most popular among the group.
When buying a share you are buying at the share price. If AAPL is trading at $150 a share and you want to purchase 100 shares of the company this trade will cost you $15,000. You make money from your trades when the price of AAPL goes up and you lose money when it goes down.
Investing Mistakes to Avoid
A lot of people like to try and predict when another stock market crash, like the great depression, is going come but every year many are wrong. And if you take your money out because the “next crash is soon” you’re only going to lose money. Trying to time the market is a losing game. Also, trying to predict when a market is going to go back up is just going to cause you to get in at the wrong time and panic sell.
A very popular strategy floating around the internet today is “day trading”, which is the purchasing and selling of a stock on the same day. Everyone that I know who has tried this continuously loses their money. Zero of the world’s best and richest traders day trade. It’s a losing game. Not only do you have to pay the fees of each trade, you also must fight against price-spread, and all while trying to buy at the exact right time. This strategy doesn’t work for 96% of the people that try it. Avoid this strategy and you will save yourself money, time, and a lot of pain.
Another big mistake many traders make is following the urge of your emotions. Giving in to your emotions will cause you to buy at the wrong time and to sell at the wrong time. You will make an impulse buy because you want to be a part of the ride up. But you get in at the end and the stock starts to move down. You panic and sell and then the stock starts its recovery again. Trust me this happens a lot and I’m speaking from experience. The best way to trade is to remove emotions. The best way to do that is to take the guessing out of investing.
All these mistakes are made time and time again by novice and professional traders alike. If you want to retire early or even just add a flow of income that can last generations, you must avoid these practices.
How to Make Money in Stocks
The best way to take guessing out of investing is to invest with everything on your side. When day trading time and emotions go against you day after day. When impulse buying your emotions get the best of you every time. The best way to put time on your side and to remove your emotions is to buy-and-hold index funds. Yes, this is the boring way to invest but do you really want to play daredevil with your hard-earned money?
The S&P 500 index has averaged 9.5% annually from 1928 to 2015. That includes every big crash you can think of and it still averaged almost 10% every year! That means if you made a budget and invested $6,000 since 1990 you would have $659,370 today! By only purchasing an index fund and holding it. It doesn’t get any simpler than that. With that, you could make $100,000 every year until the day the world blows up. For only saving 6k a year for just 20 years that isn’t too bad.
For you to be able to purchase an index fund you have to find a ticker for the ETF, which is provided by index funds. A great S&P 500 ETF is the Vanguard provided “VOO”. You would go through your brokerage type in VOO and do purchase shares using the money you’ve transferred into your investment account.
Unless you want a career in the hedge fund industry there is no need to make unnecessary risks with your money. Just keep it simple and stay away from those common mistakes and you’ll watch your money grow.