The great news is that stock market investments are the best and most profitable type of investment and you can get in with just an average income. However the bad news it that more new stock market investors lose the little income they had by making bad investments in the first couple of weeks than any other type of investors in any other kind of businesses. And there are several reasons why this happens but they can all be boiled down to a single cause: they did not do their homework; they just heard that the stock market can make for a very profitable investment and went for it. So let’s take a look at the 4 most important lessons for new stock market investors.
Keep a cool head: If you are going to get in to this business you will need to keep a very cold head and make the most boring plays in the stock market that you can think of. The problem being, of course, that many people get into this kind of investing because they hear the classic tale of someone who bought some shares, they doubled in value and they were rich overnight. And that is great but in order to hit that one in a million jack pot you will have to play the odds for a long time and in order to do that you will need to invest safe, allow the market to rise and fall and only make deals when they are most profitable.
Adopt the “dollar cost averaging” strategy: The “dollar cost averaging” strategy is basically a type of investment where you only use a set amount of money to buy stocks but you use them no matter what the status of the market is. This way you are forced to buy a lot of stocks when the market is low and fewer stocks when it is high and ultimately you end up having a rich and diverse stock portfolio.
Don’t invest unnecessarily: Another reason why people start investing in the stock market is that they somehow come in to large sum of money and they are not sure what to do with it so they believe that the best thing would be to invest it. However if you do not know what you are doing, if you have not studied the market or even if you don’t have the head for it, you may end up losing all your money or not generate any income with it. So remember that money is your friend and you don’t need to send your friend out to die in some reckless investments just to feel that you did something.
Study the soap metaphor: Anyone who has ever thought about investing has come over this metaphor by Gene Fama that “money is like soap”, meaning that the more you use it the less you will have. And what this basically says is that you need to allow your investments to mature and not rush to buy when you see that the market is falling and then sell as soon as it rises a bit. The real money is to be made when you plan to invest for the long term and allow your investments to bring back more over a longer period of time.