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Should You Invest in the Stock Market?

Should You Invest in the Stock Market?

"Traders" by Vlado on freedigitalphotos.net

Every young professional wants to be in the stock market and there isn’t much of a barrier to entry. Brokerages make the application process easy on purpose since their profits come from volume. They don’t care if you make or lose money, just that you trade a lot so they get their fees!

1 – Not a Game

The stock market is not a game like Monopoly where there are set rules. I don’t view the stock market as any type of game at all. You’ll hear talking heads on television use terms like “gaming” a market, but all that is ridiculous. If you jump in with the mindset that you’re playing a game like at a casino, you are going to lose all of your money. That brings me to the next poing.

2 – Don’t Go All In

You should only invest amounts of money that you are able to lose without a negative impact to your future. Another way to say this is that you should only invest what you can afford to lose. Each person’s definition of what they can afford to lose is different.

3 – Know Your Term

Do you want to be a short term trader or a long term investor? Each type of stock market participant has a different set of research that they have to do. In general, short term stock traders look at fundamentals as a side note, while long term investors are heavily swayed by fundamentals. On the flip side, shot term stock traders generally look for technical cues, while long term investors look at technicals as a side note. In other words, short term traders think strong fundamentals are nice, but focus on technicals and news flows. Long term stock investors think technical support is nice, but focus on the fundamentals of a company. Most of us should be in the long term camp. I don’t care how nimble you think your trading skills are. If you don’t know the tricks of the trade, you will be at a disadvantage. Short term trading also requires a lot of time and attention so if you don’t have a job and are willing to learn, you might have a shot. If you hold a full time job like I do, please think twice about being a short term stock trader.

4 – No Emotions

Check your emotions at the door when you enter the stock market. Emotions make people buy high and sell low. They see a stock skyrocketing so they want to catch the wave. Most of the time that happens to be close to the top. On the flip side, they see a stock trending down so they want to limit their losses. Most of th etime that happens to be close to the low! The right way to do it is to set levels and valuations that you are comfortable with and you have to have knowledge to do that. You have to look at balance sheets, cash flows, listen to conference calls, and the like. You cannot watch some TV, read some articles, and decide to invest in a particular stock. Guess what, that is another form of following your emotions. Emotions are just bad news when it comes to the stock market. View the talking heads on TV are nothing more than salesmen.

5 – Diversify

Do not put all your money into one stock. Listen, I know that it is hard not to look at a stock that is ramping higher and not jump on board. All it takes is one news event to take stocks down hard. Say you invested a fifth of your money in one of those high flyers, a fifth in a stable consumer staple with a dividend, a fifth in an energy stock, another fifth in a technology stock, and your last fifth in a retail stock. Your portfolio is now diversified and won’t be hit as hard if some bad news comes out about your high flying stock. It would take something like a recession to hit all 5 of those sectors at once and we just experienced one.

The bottom line is that consistency in the stock market requires a lot of time and effort. If you are okay with 1 or 2 hours a day of research for each stock you own or want to buy, then you can check that box off. You also have to be like a robot and not hit the buy or sell butons because of your roller coaster emotions. You need to have conviction in your decisions and learn from all mistakes. You need to only invest money that you can afford to lose.

I’ll be following up with a post about how to start and set up an online brokerage account. If you think you are ready, then please subscribe to receive an e-mail when my next article is posted.

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Categories: Investing
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