This article was updated on Oct. 17, 2016.
Learning to invest can seem intimidating, but it doesn't have to be. By following some simple rules, you can reduce the chance of making mistakes and get the best results possible. As you get started with your investing, here are some tips that make stock trading for beginners a lot easier to understand.
1. Find the right broker at the right price.
One of the biggest decisions that you'll make as an investor is which brokerage company you'll use. Your choice has huge implications for how much you'll pay in fees, what types of investments you'll have access to, and what your eventual returns will be. Yet few brokers make investing for beginners easier to understand. Instead, many full-service brokers want to take advantage of beginning investors, making the investing process more opaque and costing you a lot more money in the long run.
The better long-term answer is to pick a discount broker that won't charge you a huge amount in fees. Even brokers that charge relatively low commissions have a variety of resources designed to make investing for beginners easier. In particular, look for brokers that have arrangements to offer mutual funds or exchange-traded funds at no commission, as these investments can be the best way to get started investing.
2. Consider starting with exchange-traded funds.
Most beginning investors believe that to make real money in the market, you have to pick individual stocks. But that's not actually true. Millions of investors have made their fortunes using mutual funds and exchange-traded funds, and those vehicles are a great way to make investing for beginners easier to grasp at first.
In particular, mutual funds and ETFs give you automatic diversification even when you have very little money to invest. Every dollar you invest gets split across dozens or even hundreds of stocks, immunizing your portfolio against catastrophic events that hit a given individual stock. Index mutual funds and ETFs tell you exactly which stocks you own in exactly which proportions, giving you predictable exposure to the stocks of your choice. Target-date mutual funds go even further down the simplicity path, automatically adjusting your risk level as you get closer to an end goal like retirement. By acquainting you with how the markets work and how long-term returns get generated, ETFs and mutual funds make a great entry point for beginning investors.
3. Start with safer stocks.
Even though avoiding individual stocks can be a smart move for novices, there's an alternative way of investing for beginners. If you focus on stocks that tend to be less volatile than the overall market, you can get specialized exposure to stocks that have promising long-term prospects, rather than simply accepting the return of a broader index.
For example, consumer staples stocks are generally perceived as being safer than the overall market, because even in tough economic times, people still need products like food, clothing, and medical supplies. The flip side is that you generally won't see gains that are as big during a bull market as you would get from investing in more aggressive stocks. Nevertheless, at least while you're getting your feet wet, following the lower-risk strategy can be a smart method of investing for beginners to follow, and it can avoid the common mistake of losing everything on an ill-advised bet.
4. Don't pay too much in fees.
Paying too much in expenses to invest hurts your results right out of the starting gate. Instead of choosing funds with up-front sales loads and hefty annual expenses, aim your fund investments toward no-load funds with lower fees. Over your lifetime, the savings can add up to hundreds of thousands of dollars.
5. Don't fall for hot stocks, even if the company is promising.
A great company isn't always a great investment. Hot companies often have their stocks bid into the stratosphere, at which point they've lost much of their ability to produce big returns. Sometimes you have to concede that you've missed out on most of the potential gains a stock can produce and look for other opportunities that haven't yet been discovered.
These five things aren't the only important lessons for beginning investors to learn. However, they give you a good start on which to build up experience going forward.
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