INVESTING FOR BEGINNERS: TWO RULES FOR SMART STRATEGIES
When beginning to invest on your own, the world of stocks and bonds, mutual funds and options, can seem overwhelming and too steep of a learning curve for a person to ever be successful. While it certainly is true there is a lot of information out there, with two simple rules every new investor can enjoy the profits and pride that come with managing your own investments.
Beginning investors first need to understand what determines the price of a security. It isn’t magic or some secret formula, but a simple matter of supply and demand. If more people want to buy a particular stock, the stocks value will go up as sellers begin asking more and more of the large pool of willing buyers. Eventually that pool drys up and the price begins to decline as more and more sellers enter the market, buyers will once again be on the other side lowering the price for themselves while the market again balances itself out.
Deciding the type of security to first invest in is also important. Beginners often believe that buying into a mutual fund they’ve chosen is a great start to personal investing. Mutual Funds are baskets of different securities that generally have one or more characteristics in common. You’ll also be paying expensive management fees and loads for the privilege of a professional fund manager, fees that will quickly eat into your profits. Mutual Funds also only price once at the end of the day, so if the market is down you are locking in a most likely depressed price when you go to sell.
Annuities may seem like another appealingly safe option, but they often come loaded with enormous hidden fees and clauses that could severely penalize you if you want to liquidate the annuity early. Annuities also traditionally under perform the market itself.
For these reasons we generally recommend a new investor get started with highly liquid assets, such as stocks, or currency trading on the Forex. Now that we have the basics down, lets move on to our two rules for beginning investors.
The first rule: Always have a plan. Before you begin trading with your hard earned money, you must first plan your strategy and trading profile. What will you be trading? How much risk can you tolerate? What are your profit goals or loss tolerances? How much time will you be able to devote to trading and research? Tradex1
Defining exactly what your goals and plans are before investing is critical to success. Money can drive strong emotions in people, and you’ll want to have a steady head while you weather the ups and downs of the markets. Having a solid plan will not only help ensure profits, it will help steel you against the inevitable downturns that come with investing, allowing you to remain confident in your strategy when economic conditions are challenging.
The second rule: Lose small/win big. We recommend going for a reward/risk ratio of at least 3:1. That is for every dollar you stand to lose, you feel there is the potential for you to earn at least three. This way you can limit your losses if things don’t work out, but can make a tidy profit when they do.
With experience and a willingness to learn you will start to identify patterns in price charts and more accurately determine when a stock may rise or fall. After all price is simply a factor of supply and demand, and once you begin to learn how to anticipate that demand you will become successful.
There is much more to learn in the world of investing, but these two rules are a good start to beginning to manage your own money. With the help of online trading programs and tutorials, as well as numerous websites devoted to learning about trading, there is a plethora of available information for the willing investor to learn and use.