6 Things you should know before investing in the stock market

stock market

Rather than leaving your money lying dormant in your bank account, where inflation will erode its value over time, investing it in the stock market is a much better option.

That said, newcomers to the world of investments are prone to making mistakes through a lack of knowledge and experience. And where the stock market is concerned, mistakes can cost you.

To get the best possible start, here are the main things to consider so that your early investment decisions don’t come back to bite you.

Research is essential

To buy a stock with confidence, you need to know not only about the business in question, but also the niche it targets, and the wider market it occupies.

That’s why experts recommend only buying stock in companies that you know intimately already. Don’t get caught up by some hot tip that relates to a business you’ve never heard of, as it is a much bigger risk.

Nothing is guaranteed

The purpose of investing is to make your money work for you and to build a portfolio that increases in value in the long term.

However, predicting the future with complete certainty is impossible. And market volatility means while you could make money, it’s also entirely possible to lose it all.

Other types of investment, such as in real estate, can be more stable. There are also stocks and other investment products that offer low levels of risk. It’s all about knowing how to balance risk and reward, according to your circumstances and your emotional resilience.

Automated investing is a great beginner-friendly option

There are a whole host of services which will invest your money on your behalf, allowing you to sit back and benefit from stock picks selected by complex algorithms.

This is an advisable way for first-time investors to get involved in the market, because it eliminates the need to do in-depth research, or spend hours getting to grips with overwhelming trading tools.

There are also investment funds where the stock picks are made by flesh and blood traders, in the more traditional way. So today you really are spoiled for choice as a beginner.

Borrowing money to buy stocks is a bad idea

It might be tempting to take out a loan in order to buy more of an up-and-coming stock when you’ve used up all of your available cash already.

In fact, leverage is widely used in the market, but only by those with the experience and the skills to make this worthwhile.

Anyone who’s just dipping their toe into investing should definitely not adopt this approach. In fact, it’s a bad idea to tie up all of your money in stocks.

The right way to invest is to put your disposable income into the market. That way, if something goes wrong, you won’t be left destitute.

Follow the fundamentals, not the crowd

The market is susceptible to hype, and when people get hot and bothered about a particular stock, it’s all too easy for investors to throw their money behind a movement that’s gaining traction just because they don’t want to miss out on major returns.

The reality is that if everyone’s already talking about a stock, you’ve already missed the opportunity to get in at a level where you’ll make a profit.

It’s much better to look at the business behind the stock and ensure that it’s a solid prospect in its own right, regardless of what the hype-mongers might say.

Discipline is important

We’ve already touched on market volatility, and this is something that newcomers will get tripped up by if they attempt to take advantage of it.

You can’t know for sure that the market will go up or down at any particular point, so it’s better to not try to time your buying and selling of stocks with the ebb and flow of it at all.

Dollar-cost averaging is a tried and tested strategy that uses consistent, regular investments to take advantage of the average upward trend over longer periods.

As long as you keep a level head, make use of expert advice, and don’t invest more than you can afford to lose, the stock market can be a route to financial independence.

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