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You don’t own any shares of Apple, and you missed out on the Facebook IPO. Your neighbor seems to make a bundle buying and trading stocks online, but your familiarity with that concept starts and ends with the eTrade baby. So how does an investing newbie crack the stock market? We’ve got four tips that’ll help you get started on the path to financial security...
The Basics of Investing in the Stock Market
Thousands of Americans buy common stock every day, but if you’re not one of them, the whole process can seem totally daunting. Should you buy individual shares of stock, or stick to mutual funds? Before you put your hard-earned money anywhere, make sure you understand the following principles about stock market investing:
1. Keep Your Goals and Expectations in Check
Investment opportunities that sound too good to be true have a way of turning out to be, well, too good to be true. (Two words: Bernie Madoff.)
Experts know that the secret to stock market success isn’t sexy – it’s investing regularly over a long period of time in growing companies and letting your returns compound over years. In fact, most experts advise that a reasonable long-term expectation for stocks is 4- to 5 percent over the rate of inflation. In other words, slow and steady might just win the financial security race. Or, as economist Paul Samuelson, the first American to win the Nobel Prize for economic science, said: "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."
2. Do Your Research
Investment guru Warren Buffett reportedly once said, "You don't need to be a rocket scientist. Investing is not a game where the guy with 160 IQ beats the guy with 130 IQ." That’s good news for most of us non-MENSA members – but it doesn’t mean you’re off the hook when it comes to research. The fact is, your returns will be directly correlated with the effort you make to learn about the investments you make.
As tempting as it might be to invest in “a sure thing” touted by a friend, a broker or even a stranger at a cocktail party, that’s a recipe for loss. If you don’t have the time or inclination to research potential investments, find a trusted adviser for an agent. And if an adviser suggests an investment or strategy that you don’t understand or feel comfortable with, hold on to your money until you’re clear about the risk and rewards. Remember, it’s your money and your risk.
3.Stay Within Your Comfort Zone
Speaking of risk and rewards, taking a long-term, objective view is essential to your success in the market. Buy and sell stocks only when you’re comfortable with your reasons for doing so. Don't buy any securities that cause sleepless nights and stress.
Manage your investment risk by:
Don’t Borrow Money to Invest. Even though most brokerage firms are happy to lend you money for investments, it’s not a good idea for the newbie investor. While gains multiply, losses are also exaggerated. And lenders expect to be repaid.
Diversify Your Investments. This means giving up your chance of hitting the lottery in exchange for knowing you're not likely to completely lose all of your investment money.
M. Lewis is a retired business exec, avid investor, and financial contributor for various online publications.