You may have heard that one of the best ways to grow actual wealth is to invest in the stock market. However, you may not understand what markets to invest in or how to tell if an investment is a good one. The good news is that with time and experience, you will learn that mastering the stock market is not as hard as it looks.
Diversity Is Your Friend
You never want to invest in one stock or one sector of the market. Instead, you want to invest a portion of your portfolio in as many different sectors in as many different countries as possible. It is also a good idea to invest in commodities such as oil and gold in addition to stocks and bonds. Mutual funds, index funds and ETFs make it easy to diversify without having to pick equities on your own.
Watch Out for Fees and Taxes
When you buy or sell a stock, you will generally pay a fee to your stock broker or fund manager. It is also common to pay transaction fees when buying or sell shares in a mutual or index fund. If you sell a stock or another equity for a profit, you generally pay capital gains taxes. However, it is important to note that your cost basis is the value of the equity itself plus any commissions paid to buy or sell it.
Don’t Succumb to Your Emotions
You should never make investment decisions based on your emotions. Instead, you should only buy a stock, commodity or stake in a mutual fund because it meets your goals and objectives. It is also a good idea to have rules as to when you buy a stock and when you sell it based on price targets and other objective reasons.
This will reduce the odds that you buy or sell a stock based on nothing other than a temporary rise or fall in price. In fact, dips in the market may offer opportunities to buy at a lower price, which could result in higher returns in the future. This is referred to as dollar-cost averaging, and it is a technique that beginning and experienced investors alike can use to their advantage.
Focus on Long-Term Gains
Historically, the stock market offers returns of 7 to 11 percent, and a stock market projection tool can help you determine how far it may move over a predetermined time period. However, this doesn’t mean that the market literally goes up by that much each year in a straight line. If you choose to buy a stock or any other equity, you should plan on holding it for several years before selling it. Even if a stock’s price goes down, it may still offer value if it comes with a dividend.
It is normal to feel overwhelmed when you first invest in the stock market. However, there are plenty of educational resources that you can use to understand how it works and how to manage your emotions. These resources may help you create strategies that will lead to consistent gains.