Published in: Buying Stocks | Jan. 7, 2019
6 Things to Know as a New Investor
By: Lyle Daly
Image source: Getty Images.
If you’ve recently decided to make your first investment, then you’re probably going through a range of emotions right about now. There’s the excitement and nervousness about what can happen with your money, the trepidation before you actually decide to put your money on the line, and the confusion over what all these new investing terms mean.
Investing is a complex subject, and understanding it takes some time and experience. You can, however, give yourself a leg up by learning a few important things that every new investor should know.
1. You should start investing now
Nothing’s guaranteed when you invest your money, but historically, the stock market has averaged about a 9% annual return. So, if you make smart, low-risk investments and leave your money in the market for the long haul (think decades, not months or years), odds are your money will grow considerably thanks to compound interest.
The best way to start building wealth is to get some skin in the game. Make low-risk investments and invest at least a little more month after month.
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You’d have a hard time finding an investor who wishes they’d started later, but you can find plenty who wish they’d started sooner.
2. Make sure you find the right broker
To invest in the stock market, you’ll need a broker. The good news is that thanks to the Internet, you’ll have plenty of potential options at your fingertips.
Brokers can have very different setups and features, so it’s essential to choose one that matches your needs. Here are a few details to look at when selecting your broker:
- Fees -- How much will it cost you to make trades? Do you need to maintain a minimum balance to avoid an annual fee?
- Account minimums -- What’s the minimum amount needed to start an account?
- Research -- What kind of information will you have through your broker?
I recommend starting with the best online stock brokers for beginners, as they’re all high-quality brokers with platforms that don’t have too much of a learning curve.
3. Index funds are a simple, effective starting point
Earlier, I mentioned making smart, low-risk investments. If you’re wondering how you can know what those investments are, enter the index fund.
When you invest in an index fund, you’re investing in all the stocks within that index. To put it simply, you get to invest in a large selection of stocks, which cuts down on your risk. This is also a great way to diversify even if you don’t have a lot of money to invest.
Index funds may not be the most exciting type of investment, but for new investors, they’re generally safer than trying to pick stocks individually.
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4. Be skeptical
You can find investing advice just about anywhere -- books, blogs, that friend of a friend with a “hot tip.” Approach everything with a healthy dose of skepticism, especially when it seems too good to be true.
You shouldn’t expect to get rich quick through investing or find some system that helps you predict when stocks go up and down. Not only can lousy investing advice cost you money, it wastes your time as well.
5. Keep your costs down
One of the more frustrating parts of trading stocks is seeing an investment’s value increase, only to realize that thanks to the trade fee, you still haven’t made much money from it.
A big part of maximizing how much you make is minimizing the fees you pay. That’s why you should look for a broker with no annual fee and reasonable trade fees.
Trade fees are also why you should avoid day trading, particularly as a new investor. It’s extremely difficult to make money when you’re paying $5 or more per trade, multiple times per day.
6. You’re going to see investments lose money
The market has its up and downs. What’s important is that you don’t let your emotions get the best of you when your investments take a hit.
New investors make this mistake all the time. They invest when things are going great because they want to hop aboard the money train. Eventually, there’s a slump. Seeing the value of their investments go down, they panic and sell low.
It’s never fun to lose money, but here’s how you can prepare yourself for these downturns:
- Only make investments when you believe in the long-term value of the stock.
- Don’t micromanage your account. You don’t need to check it every day.
- Remind yourself that the value of your investment now isn’t what matters. It’s what the value is 10, 20, or 30 years down the road.
Putting yourself on track for investing success
Investing can be the most effective way to build wealth, or it can be a fast way to lose a lot of money. Fortunately, you can mitigate your risk quite a bit with some basic knowledge.
To sum it up, here’s how you can get started as a new investor:
- Open an account with a broker that fits your needs and that doesn’t charge too much in fees.
- Minimize your risk. Investing in index funds is one way to do this.
- Set aside a certain amount each month to invest.
- Play the long game. Stay calm even if the market hits a rough patch.
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