Many people think that investing is difficult, requires special knowledge and is not suitable for everyone. In fact, everyone can learn to invest, the main thing is the right attitude and motivation. We have prepared a step-by-step guide to help beginners take their first steps in the stock market.
Step 1. Decide on a goal
Before carrying money to the stock market, you need to understand why to do it. Whether you want to save for retirement, earn passive income or save money through investments, you need to clearly articulate your goal at the start and not forget about it in the future.
Good goals usually meet several criteria:
- Limited in Time;
Step 2. Get rid of debt
Deal with debt before investing. If you have a large loan, which takes a significant part of your income to pay off, then it is better to postpone the stock market. In the event of a portfolio drawdown, credit will only add to the stress. If the rate on the loan is higher than the expected return on investment, this is a loss of money. In this case, it is better to pay off the debts first. After that, it will become easier to invest: the money that would have been spent on loan payments can be invested.
Step 3. Form the airbag
Job loss, repairs or illness can happen at any time. Free money will provide peace of mind and secure investments – in which case you will not have to withdraw money from a broker. The same reserve will provide peace of mind in the event of a portfolio drawdown. There is no universal pillow size, but the reserve should provide 3 to 6 months of life at a comfortable level.
Step 4. Invest only free money
To do this, use the “pay yourself first” rule – when you receive any income, the first thing to do is put some money in a reserve or for an investment. This rule works with any income. 5%, 10%, or 15% of income can go to the reserve – the main thing is that the figure is comfortable. This money can be directed to a brokerage account, an airbag, a large purchase, or to buy securities at a good price.
Step 5. Tune in for a long process
In order not to be disappointed in the stock market, it is worthwhile to think in advance that investing is a long-term game. You won’t be able to enter the stock market and start making money quickly. Don’t expect big profits. And don’t trust those who promise them. The result will come, but it will take time. Instead, focus on gaining experience. It is he who will become the guarantee of future income.
Step 6. Choose your strategy and tools
One of the main rules of investing is to invest money only in those instruments that you understand. Knowing the nuances will avoid unnecessary waste of money and time.
The choice of strategy depends on your investment goals. To determine it, you need to understand the following:
- How much you want to invest;
- On what period;
- What yield do you expect;
- What level of risk can you afford;
- How closely you want to monitor the market and how often to revise the portfolio.
The first strategies of an investor should be aimed at getting, albeit small, but quick results – this will give self-confidence and motivation to continue.
Step 7. Be prepared to continually learn
Build your learning plan ahead of time. There is no simple formula for learning how to invest, so get ready to spend time and money learning and trying different approaches.
You should not try to master all knowledge of the stock market at once. Be consistent, for example, start with a narrow range of stocks, study their industries and competitors, add new asset classes, then new geographic markets. The main goal of the training is to develop your own style of investing, which will correspond to your investment strategy and will allow you to trade at a comfortable pace.
Step 8. Assess the risks
Risk is an integral part of investing. The calmness of your sleep at night depends on how accurately you assess your willingness to take risks. The easiest way to understand the acceptable level of risk is to ask yourself how much of your portfolio you are willing to lose. It is worth taking a sober approach to assessing your appetite for risk – overestimated expectations will inevitably lead to losses.
As a general rule, the higher the risk, the higher the return. However, for the novice investor, buying high-risk assets and chasing profitability can be a trap. Remember the goals and horizon of your investment. The longer the period, the more risky assets may be in the portfolio at the beginning of the journey – in the event of a drawdown, you will have time to win back losses. As we approach the goal, the main task becomes to preserve the earned funds, therefore, more conservative securities come to replace risky assets.