Stock investment has always been a lucrative investment avenue for young investors. The post-pandemic, or the “great resignation boom”, has also led many young professionals to leave their 9-to-5 jobs to pursue more independent yet profitable income opportunities. Investing in the stock market might be the most explored avenue for that.
However, business on Wall Street is not always as fascinating or rewarding as it is cracked up to be in Hollywood. There is a downside of stock investment – the price can plummet on any given day and if your stock selection is poor, you have to bear the brunt of it. For years, this fear has been keeping away many young investors from trading in the stock market.
Having said that, once you get over the initial fear, the stock market can be a worthwhile wealth-building opportunity for investors – especially for the millennials. And the post-pandemic boost in the stock market certainly points us that way.
Another thing to consider for neophyte investors is this: the earlier you invest the better. You get more time for recovery, more opportunity to take risks and your money gets to grow over a longer period. If all of these factors have you interested in the stock market, let’s get you familiar with some stock investment basics.
Stock Investment Basics
There is no shortage of investment Gurus out there ready to preach to you about the stock investment. And not all of these pieces of advice are going to work for you. Some might even argue that investing options should be your personal choice and not swayed by others’ opinions.
In all honesty, there’s some truth in that, but you should also take note there are still some basics you need to learn, especially if you are a beginner. Here are five of those simple investment basics.
1. Set Aside Some Budget for the Stock Investment
Investment is putting your money where it will get some provision to grow. And in order to grow that money, you need to plant the seed first by saving up a substantial amount and decking it out where you see fit.
Once you decide to invest in the stock market, you need to set aside a portion of your income for the investment. It doesn’t matter how much money you save, rather it is just a percentage of your income. As a rule of thumb, it should be around 10-20% of your monthly income.
You can check out the near future report to understand what portion of your money should be invested in the stock market. This is just not for investors, every person should have this specific portion of their income saved up.
As well as setting up a separate budget for investment, you also need to know which money you can invest. For instance, you might have some savings for emergency medical care or putting your kids through college. You can hardly engage that money in stock investment. There should be a clear boundary in your personal budget allocation; overlapping it will likely make you suffer in the future.
2. Know What You Are Investing For
Now you might say, “Everyone invests so that they can grow their wealth!” However, while growing wealth might be a common goal, you need to know why you are investing. Figure out specifically how much money you need, how long would it take to yield that money, so on and so forth.
For instance, some people might invest in stocks with the end goal of buying a home someday. That will require at least 15-20 years of steady investment, considering you don’t come across any fluke or tragedy – either a big win or loss.
On the other hand, some people might invest in stocks to buy a new car, and that might not require a long-term investment compared to buying a house. And for those people, the investment pattern will be different. The investment time or amount might be less. They might have to consider market volatility a bit more.
Overall, the purpose of your investment should determine what type of investment you should go for, how much risk you need to take, or whether to go for a short-term or a long-term investment.
3. Go for Long Term Investment
Stock investment is rewarding especially to those who are in for the long haul. But our built-in psychology just craves instant gratification and instantaneous rewards – be it investments or life in general. It’s rather hard for some of us to hold on long enough for something to reach its full potential.
We just tend to grab whatever profit is being yielded at the moment and the thrill of chasing that short time high never lets us think beyond the present. And that’s where rookie investors fall short against seasoned ones. They crave the instant rewards that the stock market represents all the while being completely oblivious to the profit they are losing in the long run.
Rookie investors often tend to sweat over the day-to-day rise and fall of the market, succumbing to knee-jerk reactions for every curve. However, once they focus on the long term, they can take the regular market fluctuations in their stride. Instead of chasing the short-term high and the latest hot picks in the market, adapt a long-term strategy and stick to it.
4. Diversify Your Investment Portfolio
Diversification is the golden rule for stock investment. As it has been said in Don Quixote, you shouldn’t put all your eggs in one basket; and that couldn’t be more true for stock market investment. The reason is when there is a shift in the stock market it is generally not the same across the board.
During a particular crisis, some industries can soar while other industries can barely stay afloat. And that is where diversification comes into play. If you have your investment spread out in different sectors, there’s less chance of you losing all your investments.
In a way, diversification acts as a hedge against market volatility. The reason why so many people blame the stock market for losing it all is that they don’t spread out their investments wisely.
How to Diversify Your Investment Portfolio
If you are wondering how to diversify your stock investment, here’s a pro tip: look for industries that have little or negative correlation between them. That way, they will move in the opposite direction during significant changes, if one goes up the other will go down.
For instance, when the oil price goes up, because of the increased operation cost, airline stocks fall. This is a negative correlation relationship and could be a good way to diversify your investment across these two industries. To garner the maximum profit and to absorb the minimum loss, choose wisely where you want to put your money.
5. Try Investing in a Mutual Fund
Investing in a mutual fund is the most favorable way to achieve diversification for young investors. Imagine a box of pizza where you can get a piece of every type of toppings – pepperoni, cheese, sausage, etc. A mutual fund is just like that box of pizza; it has every investment avenue wrapped up in one package.
Going with the pizza analogy, in the traditional stock investment, you buy a box of pizza that only has one type of topping, requiring you to buy several boxes to get different toppings. And you end up spending more than you need. In a similar way, to diversify your investment, you need to invest in at least 20 or more different stocks to get a hedge against the uncertainty of the stock market.
And that brings us to the dilemma that most new investors face. Whether they buy just one stock or 50 stocks from a company, they need to pay the same amount of commission to the brokerage house. But when you add up all the fees for 20 different companies, it might not be feasible for someone new to stock investment to pay that huge amount.
Why Opt for Mutual Funds Instead of Traditional Investment?
When you are confused about how to diversify your portfolio without breaking all your savings, mutual funds can save the day for you. Mutual funds pool money from similar investors like you and invest them in different sectors. When many investors team up together, it lowers the investment costs.
Besides, most mutual funds have a fund manager who manages all the crucial parts of the investment, from deciding where to invest, how much to invest, and when to pull out the investment. With a driver taking control of your investment wagon, a novice investor like you can just sit back and watch how your investment is being put to work.
The Bottom Line
Yes, it might sound like a cliché, but knowledge is power when it comes to stock investment – especially if you are planning to manage your own investment portfolio. However, it doesn’t mean you can’t start investing with just the basics. While being a neophyte you might be still dubious about starting the actual stock investment. But just know if you never tread the water, you will never learn how to survive in water.
So, start early even if it’s small, and make sure learning is your priority rather than being an overnight millionaire. Be realistic in your investment approach and see how new stock investment opportunities open up for you.