Investing in stocks can seem like a daunting and confusing task when you first decide to put some of your hard-earned money to work so that you might be able to generate a profitable return.
One of the share market basics that you need to understand straight away is the fact that the value of stocks can fall as well as rise, so it pays to have a decent grounding in how the markets operate and some of the fundamentals behind savvy investing as a way of mitigating risk and potentially reaching your financial goals.
Here is a look at the basics that you need to know if you are interested in buying stocks.
You don’t need to have lots of cash
While it is true that you should only invest money you can afford to lose, it should be remembered that you don’t have to be wealthy, or have a math degree to successfully trade stocks.
The idea is to grow your wealth over time, so a small amount of cash has the potential to become a larger pot of money. It often pays to take a medium to long-term view when it comes to investing, measuring your success over a period of at least 5 years, ideally 10 years, to allow for the inevitable rise and fall in values over that period of time.
What is your risk profile?
One of the first things to do is appraise your risk profile so that you can invest in the right sort of opportunities based on how cautious or adventurous you are.
If you like to take risks, you might decide to invest in volatile stocks like some in technology, for instance, which can rise sharply in value in a short space of time, but they can also fall hard if market sentiment goes against them.
Alternatively, you might be a cautious person who likes to keep their money as safe as possible.
There is always an element of risk regarding stock market investing, but knowing your risk profile will help you choose a path that you are comfortable with.
Remember to allow for fees
Even if you decide to pick stocks on your own, you will have to pay regular broker fees when you buy and sell investments, plus there is a management charge to pay if you decide to invest in a fund that is managed by an experienced fund manager, who makes the investment decisions on your behalf.
Diversify
Using a casino analogy, if you bet everything you have on red and it comes up black, you have lost everything.
That is not a good way to approach investing in stocks. It is considered smart to diversify and spread your risk by investing across a range of sectors and opportunities.
That way, if one stock soars, and another falls, a diversified portfolio should deliver better returns with the winners helping to mitigate the losers in your basket of stocks.
Most trading platforms allow you to practice trading stocks without using real cash so that you get the hang of things, and that can be a good idea so that you know what you are doing when the time comes to commit real cash in your quest for a brighter financial future.
