Anyone can win in the stock market. We firmly believe this. No matter what their background, their occupation, their schedule, or even their wealth might look like right now, everyone can do it. The potential for profit on the stock market is open to everyone.
Of course, we understand that it can be intimidating. With all of the options and strategies, along with the sheer size of the securities market, it’s hard to know where to start. But you don’t really need all that much to do it.
Much of what you’ll learn about investing in stocks, you’ll find out as you go. However, there are a few concepts and approaches to know before you buy your first share. We’ve outlined some of the most important tips for new investors here.
First-Time Investor Tips
Set Your Goals
The first-time investor faces a lot of options. These choices can be difficult to understand and navigate. Before you take even a single look at these elements, step back and consider why you’re investing.
Growing wealth is the primary motivation for people to get into investing. It’s the reason why people get into a lot of things. But to guide your investment strategy, it’s wise to be more specific about what you want to raise money for.
Retirement is a very common motivator for investors. They want to ensure that they have enough money to live on after they stop working. That’s why a lot of employers set up and contribute to 401(K) plans for their workers. Investors looking to boost their retirement funds are likely oriented toward the long term.
Other first-time investors might be looking to fund a major purchase, like a car or a down payment on a house. They look for investment opportunities that are both dependable and quick to generate returns. They may be establishing a college fund for their children (or themselves) and take a slightly longer view.
Some people want to invest for a living, hoping to earn enough from their portfolios to create regular income. These investors are usually geared toward more volatile investments that generate immediate profits.
Name whatever it is that’s motivating you to invest. This does more than shape your investment approach — it gives you a clear picture of your goals. It’s easier to make wise decisions when you know what you’re trying to accomplish.
Decide How Much Risk You Can Tolerate
You’ve heard this 1,000 times, so here’s 1,001: All investing entails risk. Nothing in the stock market is a 100% sure bet.
Some strategies are riskier than others. The one that you choose should be determined, at least partially, by how much risk you can stomach.
Many retail investors are comfortable with taking more chances. They’re more active traders. They chase short-term profits in several commodities at once. They’re willing to take chances with unproven, but promising start-up stocks.
These investors understand that they’ll have some losses. But they can handle them because of the prospect of getting bigger gains from the winners. Some may even enjoy the fear, in measured doses. That can be a motivator to move forward to find the next deal.
Other investors like to keep things safer. They take as few risks as they can. They build portfolios with investments in confirmed, long-term winners. They seek companies that have become too big to fail (in the positive sense). They may not strike a big payday, but they know that they’ll rarely lose. When they do, they know they’re likely to bounce back and start earning again.
Then there’s the middle ground. These investors are okay with a mix of investment prospects. They’ll leave some of their investments alone, knowing they’ll grow slowly but surely. They may put some money in mutual funds as the backbone of their portfolios. They’ll have stakes in smaller companies that could grow more quickly.
There will always be fluctuations in the stock market — that’s a given. You know better than anyone how many risks you can handle before you start to get nervous.
The stock market was built to accommodate all investor types. But it works best if you know exactly which type of investor you are. That’s why one of the most important first-time investor tips is to evaluate your risk tolerance before you jump in.
Look to Diversify
Many new investors take a “start small” approach when they dip into the stock market for the first time. They’ll begin with investments in just one security or maybe a handful.
Others may invest in only one sector at a time. They might invest in a batch of tech companies or hold shares in multiple health care stocks. But they’ll ignore sectors like real estate, construction, and communications.
There’s nothing wrong with being gradual or cautious when you’re starting to invest. It’s probably a good idea to an extent. But it’s important to avoid stagnancy.
If you tie up all of your money in a single type of stock, you’re banking on just one company. Your fortunes will be linked to the performance of that one company alone. Even if that company is a monster success, if it ever takes a nosedive, so do you. And you’ll have nothing to offset that loss.
You take a similar chance if you only concentrate your investments on one kind of business. Oftentimes, market declines happen across entire industries, while other industries might be unaffected. Sometimes, the entire tech sector suffers a recession, while the construction industry booms. Consumer goods companies might suffer a slowdown, while health care stocks explode.
Diversity is a big key to a successful portfolio. As a first-time investor, establish that as a goal. You’ll want to expand the number of companies you invest in and the sectors your investments cover.
Many financial experts suggest having a portfolio with at least 25 different positions. Some say 30. Others go even higher. Almost all experts suggest focusing on more than one sector.
A diverse portfolio is better protected against sweeping losses. Your more profitable investments can take the edge off of those that are experiencing rough stretches. The sectors that have booms offset those that are enduring industry-wide declines.
It’s fine to start small, but don’t stay there. Keep the goal of broadening your portfolio in mind.
Use Your Personal Experience to Make Investments
Everyone has a level of expertise about something. You might be an emergency-room nurse. You might tend to an herb garden. You may have a basement full of action figures that are still in their original packaging. You might drink a lot of tea.
Some of those things may seem trivial. But they can be extremely important to your investment decisions.
People gravitate toward what they know. They feel confident about executing in matters that they’re familiar with. The more that a person knows about a given thing, the better decisions they can make about it.
One of the most valuable tips for new investors is to start with companies they understand. They know what these businesses do because they do something like it themselves.
A nurse has inside information about health care businesses that a bus driver might not. But that bus driver may know more about mass transportation.
A realtor knows more about the trends and regulations that affect their business. Someone who eats a lot of Mexican food knows more about the companies that make and sell the ingredients used in Mexican cuisine.
We could go on. The point is to apply the knowledge you’ve gained from your career, hobbies, and interests toward your stock holdings. Your expertise gives you an analytical tool to work with. And you’ll have a more personal connection to the stocks you own, a more vested interest. That always helps.
Know What the Companies You Invest in Actually Do
Investing in what you know is smart, but there’s a flip side to this philosophy.
Diversifying your portfolio means going outside your comfort zone. You’ll look for prospects that offer goods or services you’re not familiar with. That is a positive step.
But it’s not one to take blindly. If a promising stock intrigues you, but you can’t explain what the company does, you need to learn.
What’s their core business? What do they provide to their customers or clients? How do they make profits? What do they make? What do they sell? How do they make customers happy?
One of the better first-time investor tips is to be able to explain what the company does in one or two sentences at most. “They make semiconductors that filter out noise on phones using the 5G network.” “They help first-time homebuyers finance their mortgages.” “They build multimedia customer experiences for high-end fashion retailers.” “They make chewing gum.”
You’ll want to find out more, of course. In time, you’ll learn about the company’s leadership, stock history, and specific financial indicators. But the first step is to know why they exist in the first place — what is it they do?
Use Reliable Sources
Information on everything has reached critical mass. The average first-time investor has a ton of online resources for learning about the stock market. There are sites for market news, developing trends, company histories — you name it, it’s there.
It’s not terribly hard to find reliable, dependable sources. Many are invaluable. Investopedia is a godsend for anyone wanting to learn about economic fundamentals. Yahoo! Finance is especially renowned for thorough reporting on the stock market.
Some popular sites charge a premium for their news and stock-picking services (including us). The subscription fees aren’t always tied to quality information. The best sites use data, metrics, and explainable analytics (including us).
Filter your media sources carefully. While many TV financial pundits are real experts, some are more focused on entertainment than analysis. That doesn’t mean they’re always wrong. But the context isn’t always dedicated, thoughtful, or data-driven.
It’s okay to watch your favorite media personality. Just have more trustworthy sources on your side, too…even if they’re boring.
Don’t Invest Emotionally
Speaking of being swayed by excitable TV personalities, that reminds us of one of the most crucial tips for new investors (or any investors for that matter). That’s to keep your emotions out of stock trading.
This includes excessive fear, as well as irrational hope.
Sometimes, you’ll see massive movements in stock prices. Or you’ll see a bunch of traders making a large volume of transactions. High sell-offs happen mainly because investors are spooked about something. Similarly, massive buys happen because investors are overly giddy.
That doesn’t mean that there aren’t good reasons for market fluctuations. But much of the activity isn’t based on reason — it’s based on emotion. Rather than making informed, data-based trading decisions, investors work from a sense of elation or panic.
Why is this a mistake? Because emotional investing clouds reality. When your psyche or “gut feeling” drives decision-making, it eliminates the real factors you must consider. It makes fundamentals less visible. It’s easy to turn that emotion into a pattern and to make it part of your ongoing strategy. That’s dangerous.
When you see a bull market happening or notice a bear market developing, don’t overreact. Learn why it’s happening. What’s behind the wave?
Maybe a parts manufacturer landed a big government contract. Maybe an agribusiness suffered major losses in a drought. Investors are reacting to those short-term developments. But are they legitimate trends or false flags? It’s hard to tell whether investors are acting from their emotions.
You’re going to experience hope and uneasiness as an investor. You’re human…it happens. But don’t let those feelings push you into immediate decisions. Find the facts. Look at contexts. Study the history.
Schedule Your Investment Account Contributions
As a first-time investor, you probably entered into the market with a certain amount of cash. Your parents gave you $1,000 to open an account. You got a bonus from work. You sold your house and kept some profits. Or you found a bag full of cash in the middle of the desert and nobody seems to be asking about it. (But keep your phone close and don’t buy a sports car for a few months.)
Whatever amount you used to get started in the stock market, understand that it won’t be the final time you invest. The last of our first-time investor tips is to keep funding your portfolio on a regular basis.
It doesn’t have to be more than you can afford. It just needs to be scheduled. If you can only afford to put $10 into your investment account every week, that’s fine. It’s better to make modest contributions on a regular schedule than to wait for a larger lump sum.
You don’t have to buy stock immediately with your regular contribution. Just let it sit (and grow) as cash in your brokerage account until you’ve decided to make a trade.
The point is to keep growing your resources to make more profits in the future. And it’s better to be gradual than to be irregular. That’s the tempo of the stock market, and it’s worked for hundreds of years.
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