The first thing you need to understand about buying stocks is that every stock you invest in is a gamble. But the risks you take on are not blind risks, they are educated risks. When you invest in a company’s stock, you make an educated guess based on that company’s performance history, what you know about the product, the state of the market, and any other insights you may have gained in your search.
The more you know about a given stock, the better your chance of making a good investment will be. But knowing your stocks isn’t all there is to playing the stock market. You also have to understand the stock market itself and develop a clear idea about how much risk you can tolerate.
Here are five surprising tips that experienced investors might not share with you.
1. Get Ready to Lose
As we have already said, investing in stocks is a gamble. That means a given percent of the time, you will lose money. The idea is to develop a stock profile that is diverse and robust enough to tolerate those losses. A lot of people lose their nerve the first time they get hit. It could be that they put too much capital on the line, or it could be that they simply don’t understand the game. Most of the time the latter is the case.
2. Quality vs Quantity
While it is wise to diversify, too much diversification can be excessive. It really comes down to the quality of the research you’re doing. Learning about the strengths and weaknesses of a stock in a deep and meaningful way takes time. If you’re bent on buying 80 different stocks, your aim isn’t going to be very good. To begin, choose only a handful of stocks. Spend an entire day researching each stock you choose and compare brokers online. You should know your stocks intimately, and if you own too many- that’s impossible.
3. Bet With Your Head, Not Your Heart
Remember; buying, trading, and investing in stocks is not a spectator sport. You may root for your favorite football team because you were born in their hometown. But you need to throw that kind of thinking out the window when you play the stock market. If you’re buying stock in a toy company because you loved their products when you were a kid, you’ve got the wrong idea.
You buy a stock because you know something about how it will perform, period. You do not buy a stock because you think the company is amazing.
4. Buying Stocks is 4-D Chess
Buying stocks is not a game. It’s a blood sport. The market, companies, competing stocks, and especially other traders are out to make a fool of you. Before you can consider yourself a competent stock trader, you need to be making your decisions based on an understanding of the market that incorporates historic knowledge, trends, and market psychology over time. You need to understand how the market moves through its environment. That may sound intimidating, but what it really means is that if you’re motivated to learn- there’s no limit to how competent you could become.
5. Bet Square
While you may be tempted to invest in some innovative upstart- over time your best bets are going to be long time proven winners like medical supplies, basic computer components, infrastructure supply, and so on. Think legacy, and think ‘behind the scenes.’
If you wish to succeed, stick to this advice and do your research before making your first investment.