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Tips On Becoming A First Time Stock Market Investor

Tips On Becoming A First Time Stock Market Investor

Every individual who has money in their pocket or cash in the bank should also have personal investments. That doesn't mean everyone has to own stocks but they should be taking steps to have their money work for them like planning for retirement or saving for college. Investments can range from the safety of Certificates of Deposit to trading in futures contracts. Most consumers however watch the news, get excited and want to become first-time stock market investors. That's great, but there's a lot to do in order to be successful and avoid making common investment mistakes.

Personal Finances

It's an accurate characterization to say investing in the stock market is like gambling in Vegas. While a strong multinational corporation is unlikely to see its stock price drop precipitously, there is still a certain level of inherent risk. The number one best piece of advice I can offer first-time stock market investors is don't use money you can't afford to lose. If you have $10,000 and you need to have that money a day or a month or a year from now, then don't buy stocks. Also, don't invest in stocks when other more pressing financial concerns need immediate attention like paying down debt or buying a replacement vehicle. Establishing priorities is a big part in any type of investing.

Getting Started

If investing in the stock market is for you then it's actually quite easy to get started thanks to the Internet. Creating an online brokerage account for trading stocks only takes a few minutes and a deposit. Many nationally recognized highly reputable brokerage firms exist so the only question is whether you go discount or full-service. Discount brokerage firms offer less hand holding but also charge smaller commissions and fees. Full-service brokerage firms costs more but are better suited for first-time market investors who are unsure about what to do next.

Risk Tolerance

Risk tolerance is a term used to describe how comfortable an individual investor is with an investment vehicle's associated level of risk. On an increasing scale in risk, money market funds have no risk, stocks and bonds have a medium level of risk and futures trading is incredibly risky. Sometimes, first-time investors get in over their head and purchase investments they are unfamiliar with losing everything. There is nothing wrong with sticking to safer investments just understand that overall return is often tied to investment risk. Even within stocks themselves, some are riskier than others such as the difference between an growth stock mutual fund and a single tech stock.

Stocks vs Mutual Funds

If you're going to invest in stocks, there are two primary ways to own shares of a publicly traded company. The first is to purchase individual shares on the open market for a single organization. An example of this type of trade would be a market order to purchase 500 shares of AAPL. This would by 500 shares of Apple at whatever the current market price is. This may not be to every investor's liking but they still want own Apple. For those investors, purchasing shares in an index fund or tech sector mutual fund may be the solution. Mutual funds purchase multiple shares from a wide variety of companies which helps minimize risk and smooth out price fluctuations. If any one stock has a problem, the entire mutual fund won't be as negatively affected.

Conducting Research

Regardless of whether you purchase shares in a single stock or a mutual fund, it is always important to conduct research first. Never purchase any investment blindly or act on tips or suggestions from others. All online brokerage firms provide sophisticated investment analysis tools to help individual investors research stocks and companies. Fundamental and technical analysis goes into the detail of financial records and charts but even a moderate overview is still better than nothing. If you are unsure about a stock or it doesn't match your selection criteria then move on to the next candidate.

Fees, Gains and Losses

There is no such thing as a free lunch and every investment has fee and tax implications. When conducting a transaction, there is a commission fee for both buying and selling shares. This is normally low relative to the amount of stock bought or sold but it is still best to limit the number of transactions as much is possible. There inevitably will be times where a stock is sold at a loss but hopefully more times where there is a gain. Capital gains and losses have tax implications first time investors need to consider. A maximum of $3,000 in capital losses can be claimed on a tax return in a given year. Capital gains are either of a short-term or long-term variety and have different tax rates respectively. Familiarize yourself with all applicable fees and taxes when investing in the stock market.

Image by: Dan Bergstrom