Stocks, also known as equities, are securities that give people an ownership interest in a publicly traded company. The stock market refers to the collection of stocks that the public can buy and sell on various stock exchanges. The major US exchanges list thousands of stocks, which means that for beginners, the process of choosing stocks to invest in can be particularly challenging.
A good place to start is by setting long- and short-term investment goals based on an assessment of your financial needs. This helps you to identify the duration you can hold the stocks you buy and the most suitable investment avenue for your financial needs.
Next, decide how much to invest. The stock market is not a good option if you might, for example, need the money within the next three or five years. Although in the long run, the stock market is likely to rise based on past markets, stock prices are uncertain and sometimes drop by as much as 20 percent in a single year.
It also advisable to only invest what you can afford to save. For example, don’t divert the money you might need for your child's next semester’s tuition fees, your vacation savings for next year, or money you are saving for a house down payment, even if you don’t plan on buying the house for several years.
For stock market investors, conducting due diligence is a crucial step. If a company interests you, read its financial reports, look for signs of management competency, and whenever possible, look for independent research or reviews on the company as well as the industry. The goal is to understand the company’s future growth prospects.
When investing in the stock market, diversification is important. Through diversification, or investing in a diverse range of stocks, you reduce your overall risk. In such a situation, if one asset performs poorly in the market, it won’t hurt your entire investment portfolio. Investing in one stock or company is comparable to having all your eggs in one basket.
In terms of diversification, mutual funds and exchange-traded funds (ETFs) may be a good option. A mutual fund pools money from many people and invests in securities such as stocks, bonds, and short-term debt. On the other hand, an ETF is a collection of bonds or stocks managed by professional money managers as a single fund traded on a major stock exchange.
The stock market can be highly volatile and unpredictable. Correctly timing market movements is challenging even for experienced traders. Before investing, beginner investors should first determine their most suitable entry and exit points. The entry point is the price at which you would buy a stock, while the exit point is the price at which you would sell. Choose a well-established trading strategy based on research and market analysis to help you choose an entry and exit point that will reduce your investment risk.
Because the stock market is always fluctuating, you will inevitably incur losses from time to time. Investors need to be ready for unexpected downturns. For example, during the COVID-19 pandemic, the stock market plunged by over 30 percent, although it rebounded in less than a year.
The investments should be guided by your time horizon or investment timeline. If you have a long-term time horizon, you have better chance of riding out market downturns or upswings. If, however, you need the money in the short term, say, in less than one or two years, you need to adopt a different strategy for selling or holding your investment.
Should a stock disappoint in performance or experience heavy market losses, it may be prudent to cut your losses by selling it. Such a strategy may save you from a steeper or more devastating loss that you may not recover from quickly.
