We all want to make more money, especially now. Perhaps your income from your day job is no longer satisfying you. Maybe your expenses have increased but you don’t have the ability to change careers at the moment. Chances are that you’ve probably heard about people making extra money through investing in the stock market, especially if you currently have some money saved. But moving forward with a stock market investment is a major decision. Whether you want to become one of the 4 million Americans who wear braces or you’re trying to finance the education of your future children, you might be worrying about whether or not investing in the stock market is a good way to go.
Stock market investing is not the right option for everyone, but it can be potentially lucrative. At the same time, investing in the stock market improperly can result in the loss of money. There is a reason why many people devote their entire careers to the stock market — though you certainly do not need to spend all of your time on investing in order to make an additional income.
If you don’t know much about the stock market just yet, there are plenty of ways that you can educate yourself before you begin investing. Education is key to success and avoiding some of the common mistakes that new investors make. With that being said, let’s look into some of the things that you should do, as well as some of the things you shouldn’t do, when investing in the stock market.
Do: Start Small
Generally speaking, it’s advised that people building their investment portfolios have “nest eggs” of money to build off of. This means that if mistakes are made, they have a cushion to fall back on following a financial loss. But that will only happen if they don’t immediately invest most of their money. You need to start small. Invest the lowest possible amount at the beginning, and build in minor increments.
Don’t: Put All Your Eggs In One Basket
It’s important that you don’t limit your portfolio, even as you start small. If you’re just investing in one stock, the risk is much higher than it would be if you diversify. Yes, you need to start small. But over time, begin exploring other stock market investment options. This means that if one of your stocks starts performing poorly, it won’t harm your overall portfolio too much. There is a careful balance to strike between diversifying too much and not diversifying enough.
Do: Find a Mentor
Part of educating yourself is finding a mentor who has experience in investing. A good mentor can guide you and model for you the kinds of stocks that you may have success with. This doesn’t mean that you need to mimic your mentor’s portfolio exactly. But you can at least know that you’re heading in the right direction if you follow your mentor’s example at first. While it’s also important to do your research through books and websites, finding a mentor can give you the kinds of hands-on guidance that is extremely beneficial.
Don’t: Invest Blindly
At the same time, you need to make sure that you aren’t blindly listening to one person’s opinion. Once you open a trading account, you’ll probably begin receiving messages with “free tips” almost immediately. They will purport to advise you about buying and selling. While it may be tempting to take free advice, remember that it probably isn’t actually free. This could be an attempt to manipulate the stock market and mislead people. Therefore, you need to be careful before taking any advice that seems too good to be true.
Do: Cut Underperforming Stocks
There is no point in sticking with stocks that aren’t performing up to your expectations. Hold on to your winning stocks; that way, you can get even more out of them in the long term. But cut the stocks that are underperforming. This will help you build the best possible portfolio and offer the strongest results. Don’t assume that an underperforming stock will somehow turn around if you have no reason to think so.
Don’t: Take Unnecessary Risks
Investing in the stock market is not like gambling, so you shouldn’t treat it as such. Don’t take unnecessary risks in terms of your money, and for that matter, don’t take unnecessary risks on a legal level. You would be far from the first person to get into legal trouble based on risky maneuvers with the stock market. By July 2015 there were over 70 million people with criminal records indexed by the Interstate Identification Index — and a good amount of those people were white-collar criminals who broke the law while investing in the stock market.
Do: Stay Consistent
It might be easy to invest in a strong market and get excited. But you need to stay consistent. Don’t simply pull your investments when the market is down. The problem with leaving the stock market when it’s down is that you’ll miss out on the opportunity to invest in great, discounted stocks. If you want to make really good money, you need to stay in the stock market for over a year. You also should have a regular daily routine. Remember when things open and close. For example, the stock market typically closes at 4 p.m. Eastern time on weekdays, but the stock index futures close 15 minutes afterward.
Do: Educate Yourself
There tons of very good stock market books out there. Consider finding two or three good basic overviews, and reading them thoroughly so you’re aware of the basic concepts. A good place to start would be the Dummies series by Eric Tyson. Other good investing books would be Peter Lynch’s One Up On Wall Street or Common Stock, Uncommon Profits And Other Writings By the late Philip Fisher.
Don’t: Expect to Get Rich Quick
Like we said earlier, you can potentially make an additional income when investing in the stock market — and at times, you can make quite a bit of extra money. But don’t expect to get rich quick or to get fabulously wealthy at any point. Yes, there are people that have experienced large returns based on one investment, but this isn’t common. If you have a return of 12-18% a year, you are generally doing quite well. The more experienced you are, the better your returns will be. So be prepared to dedicate yourself to learning!
Investing in the stock market requires time, energy, and patience. You need to look at your first investment as a learning experience and understand that it will take you quite some time to learn.
If you’re serious about stock trading, consider reading our review on the best laptops for stock trading.
Or, for some interesting financial planning questions, consider checking out our article on living off the interest on a million dollars.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.