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Trading has never been so compelling as it is right now. 2020 was terrible, but it drove millions of new investors to the markets. These quarantined newcomers did more than dabble – they played a big role in driving global stock exchanges to new heights.
However, as easy as trading mechanics are, investing can take a lifetime to master. There is so much to learn – calls, puts, long positions, short positions, index funds, and penny stocks are just the beginning.
What to join the party? In this post, we’ll run down the basics of investing so you can hit the ground running.
1) Never Invest What You Can’t Afford to Lose
We put this at the top for a reason. When you begin to trade, your first big win will be intoxicating. So it’s easy to fool yourself into thinking that you’re an investing expert. Sadly, some novice traders, thinking they can’t lose, end up shovelling most/all their life money into a position.
If you’re randomly clicking buttons, a fall to Earth is inevitable. Cratering your investing bankroll is not a fun experience, but cratering your life savings? Yikes. No matter your approach, ensure you cover rent, utilities, groceries, and other bills before moving money into your investment account.
Not only will this save you from financial catastrophe, but it will also let you make sound investment decisions.
2) Start by Parking Your Capital in an Index Fund
We’ll be blunt – if you’re reading this, you probably know next-to-nothing about investing. Don’t take this the wrong way – we all started as investing novices. Even Warren Buffett has lost money and made mistakes.
So, begin your investing education by learning the basics. As you do, though, don’t let your capital sit idle – stick it in an index fund. Ideally, pick one that tracks the S&P – you might not have the skills to beat The Street (yet), but you can copy them.
This way, while you read about the finer points of equities trading (we recommend A Beginner’s Guide to the Stock Market by Matthew Kratter,) your money will likely grow.
3) Solidify Your Portfolio with Blue Chip Stocks
At some point, though, you’ll need to dip your toe in the pool. By now, you probably want to let’er rip – but wait. When you begin crafting your portfolio, you’ll want to build a firm foundation first. Remember: you’re about to invest your hard-earned cash into this vehicle. When things go south, you don’t want to lose it all.
For this reason, build most of your portfolio using blue-chip stocks. Blue-chip stocks are equities that represent well-established brands like Wal-Mart. These companies provide goods and services that everyone needs – because of this, they are well-capitalized and stable.
At a minimum, 80% of your equities should be blue chips. The mature status of these firms does cap their growth, but you won’t lose badly when the economy tanks.
4) Take Care With Penny Stocks
“You can’t lose what you don’t put in the middle – but you can’t win much either.” This quote, said by fictitious poker player Mike McDermott in the movie Rounders, perfectly underlines the downsides of playing too cautiously.
It can be painful to watch a 100% blue-chip portfolio break-even while emerging companies are soaring. So, we recommend setting aside a small chunk of your account for more speculative plays.
Of these equities, penny stocks attract the most attention. Penny stocks are equities that cost less than 5.00/share. The mania surrounding them is understandable, as it’s easy to scoop up hundreds of these shares at a time.
Add hype to the mix, and it’s easy to realize double-digit (or even triple-digit) short-term gains. Of course, the opposite is also possible. If you pour a ton of cash into a position and it plunges 80%, you get to watch your capital evaporate in real-time.
However, not all penny stocks are hyped-up duds – for every CYNK, there’s an AAPL (that’s right, Apple was once a penny stock). But, considering their risk profile, we recommend investing no more than 10% maximum in this asset class. If you’re a conservative investor, minimize your exposure to 1 to 2%.
Always do your research – catch up on the latest news and penny stocks to watch on sites like InsiderFinancial.com.
5) Playing the OTC Markets? Do Your Research.
There’s more to investing than what you see on the NASDAQ or the NYSE. Thanks to the internet, you can now trade equities without a centralized exchange. In the industry, traders know these virtual trading hubs as OTC markets.
Because of their less stringent listing requirements, OTC markets make it easier for startups to access capital. However, OTC-traded stocks also come with significant risks. For example, OTC markets lack the transparency required by mainstream exchanges. Because of this, companies with serious issues (like those going through bankruptcy) can continue to trade.
You can realize substantial speculative gains on OTC stocks, but you can also lose your shirt. Double down on your research before buying.
6) Find High-Yield Dividend Stocks And Stock Up on Them
Once you find your trading feet, look to the future. The endgame of investing is generational wealth. To achieve this, you need to amass enough capital to realize significant dividend returns. As your capital grows, you should channel an increasing amount into high-yield dividend stocks.
Most of these equities pay out a portion of company profits every quarter. As your position in these stocks increase, so does your take. Think ahead to 30 years from now – let’s say you have 2.5 million dollars invested in dividend stocks. These equities have an average price of $50 and a yield of 4%.
Every quarter, you would reap $25,000 per quarter in capital gains. What would you do with $100,000 per year in sweat-free income?
7) Expect Volatility
As you progress on your investing journey, there will be dips. Some will test your faith, like the Global Financial Crisis. During that time, the S&P took a 50% hair cut. But the rebound that followed was epic – from 2008 to today, this index rebounded by more than 300%.
Hold on with diamond hands, buy the dip (within reason), and you’ll maximize your long-term returns.
Take Your Financial Destiny Into Your Hands
In life, you only get what you fight for. If you want to build lasting prosperity, investing in fee-heavy mutual funds just won’t do. Learn how markets work, find equities with good value, and hedge your risk, and you’ll enjoy better results than the average investor.
You may also like: 7 Ways To Assess Your Investment Options
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