Thinking
about investing in the U.S. stock market often conjures up images of
powerful people moving huge amounts of money into and out of the market
thereby increasing their fortunes. Or, the image of the average
American investor putting the little bit of money he has into just
the right stock and becoming rich overnight. It may even bring up
images of the day trader who starts out with a small amount of borrowed
money in the morning, and turns it into a small fortune by the end of
the day. Many people think of the stock market as a place where
the possibility always exists of becoming very rich, very quickly.
In this article, I am going to discuss the differences and
similarities between how many investors perceive stock market investing
to be, and what it usually is really like. Before we get started,
please know that, although I am by no means a stock market investing
expert, I am fairly knowledgeable on the
practical
aspects of investing in the United States stock market. I have
bought and sold stocks using cash, I have bought and sold stocks on
margin, and I have utilized put options, call options, and other such
stock derivatives. I certainly have not "done it all" when it
comes to investing in the stock market, but I have done quite a
bit--enough to know how investing in stocks really works, and what to
expect. So, here we go...
I love the stock market!
First
of all, I have to say that I truly do love the U.S. stock market.
In my opinion, it represents an unparalleled opportunity to get a
good return on invested money, but only if it is done correctly.
Over the past seventy years or so, the stock market has averaged
a return of between ten and twelve percent per year. Of course,
this is just an average. The stock market may actually lose eight
percent one year and earn eighteen the next. But, longterm, it
averages out to between ten and twelve percent. That
predictability and consistency is what makes the stock market such a
great opportunity. Plus, the market is available to just about
anyone regardless of how much money they do or don't have.
I am not one of those people who say to never put money in the stock market. But, I
am one of those people who think that if you don't do it correctly, you are going to get financially hurt.
Good news and bad news...first, the bad news:
Before
I get into exactly how to go about investing in the stock market, I
need to dispel some myths, burst some bubbles, get the stars out of
your eyes, and get your feet firmly grounded with regard to stock
market investing. For that reason, I am first going to discuss
some of the pitfalls and dangers of stock market investing.
How NOT to do it.
Seminars
Be
very, very careful when it comes to courses and seminars about how
to invest in the stock market. Unless you have taken extensive
coursework at the college level, these little one-day or weekend
seminars will generally teach you just enough to cost you a lot of
money very quickly. These seminars are designed to make money for
the promoter of the seminar, not for the people who attend.
Often, just attending the seminar costs a lot of money--hundreds, sometimes even thousands of dollars.
Then, once you're at the seminar, they try to sell you their
books, software, audio lessons, recommendation service, etc. Even
if the seminar is free, they then try to sell you a better, more
in-depth seminar that is
not
free along with the materials I already mentioned. I once
heard an advertisement for a particular stock investing seminar which
touted a 20% return per month in the stock market if you use their
system. That's 20% per month, not per year! If their system
is so great, why are they wasting so much time teaching and selling it
rather than just using it themselves? Let me explain what I mean:
If their stock market system really could return 20% per month,
then if they invested only $10,000 of their own (or borrowed) money, at
the end of five years they would have over half a billion dollars!
And if they did it for ten years, they would have over
$31,000,000,000,000! If they truly did have a system that could
return 20% per month, then they would be losing money by teaching it
when they could be at home using it. Why do they teach their
system instead? Because that's where they make the money, not by
using the system. After a few years, the company went bankrupt.
What does that tell you about their system?
Even if the
claim were a little more believable, say doubling your money each year,
they still would be losing money by wasting their time teaching instead
of doing. If they used only one hundred thousand dollars of the
money they spend putting on the seminar and instead invested it using
their system, they would have over $100,000,000 in ten years!
Yes, the seminar will probably teach you how to find a broker,
open an account, and put in your buy-sell orders, but not much more.
You can teach yourself those basic things for free on the Internet or
at the library.
And make sure that you totally ignore the
testimonials. Those will only be the people who got lucky or even
made the money some other way but happened to have attended one of the
seminars. They'll say things like "I attended the XYZ seminar,
and now I bring in three million dollars per year." You notice
that they didn't say they did it all using
only
whatever system is being taught. Maybe they have a job that pays
three million per year. For every positive testimonial, assuming
that is is even the truth, there are probably thousands of people who
lost money using the exact same system from the exact same seminar.
They never tell you about those.
I hate to say it, but
these seminars generally play on people's greed and laziness.
People think they are going to attend a weekend seminar, make
tons and tons of quick, easy money, then spend the rest of their lives
rich and living in luxury--and they think they'll do it all from
the comfort of their own homes and
with very little work. "Just an hour a day" as one such seminar
claimed. Well it just isn't true. You can't spend only one
weekend of your life learning a stock investing system and then use it
to become filthy rich with very little effort. It just isn't
going to happen. What
will
happen is that you will have wasted the money you spent on the seminar,
and will most likely lose all of the money you invest. Please
don't waste your money and endanger your financial future by attending
these seminars. If you want to learn more about investing, spend
some time in a public library or take some adult education courses at a
local college. If you want to increase your chances of
successfully investing in stocks, then use what you're learning in this
article. It works, and it's free!
Day trading
If
you ever hear the term 'day trading' then run! Day traders are
people who supposedly invest a bunch of money in the morning and then
sell off their stocks at the close of the market for big profits.
There are many seminars and online courses that teach various
forms of day trading. I truly believe that day trading is the
number one, most dangerous way to invest in the stock market! I
came across a statistic recently stating that 80% of day traders have
lost money by the end of the year. From what I've seen, I think
it is much worse than that. I personally have never seen
anyone
make money consistently by day trading. And even if there are 20%
of day traders who make money, it doesn't say how much they made.
Maybe they cleared a few hundred dollars of profit for the entire
year by day trading. That would sill be a profit, which would put
them in the 20% of 'successful' day traders, but would certainly not be
worth the risk, effort, aggravation and time they spent day trading.
If you were planning a vacation and then found out that at that
destination you would have an 80% chance of getting killed, would you
still go? I sure wouldn't! But if you day trade, that is
exactly what you are doing financially. An 80% chance of getting
killed! Day trading doesn't work. Day trading will almost
assuredly cost you most, if not all, of the money you invest.
Don't do it!
Stock recommendation services
These
often take the form of a website or newsletter that claims to be able
to recommend stocks that are about to skyrocket in value. The
first problems I have with such services are the same problems I have
with stock investing seminars. If their recommendations are
really that great, then why are they trying to sell them to me instead
of using their own advice to become rich? From time to time, I
receive a mailing advertising some such company. In the brochure,
they show me some of their past recommendations and then show me how
much they went up. Then they tell me how much money I could have
made if I had been one of their subscribers. If their service is
really that accurate and consistent, then why do they have to do bulk
mailings to people they don't even know in order to sell their
recommendation service? If their system worked consistently, over
time, then they would have more business than they could handle and
would be turning customers away, not sending out bulk mailings asking
me to send them money for their service.
Over the longterm, no one can pick stocks that consistently and predictably shoot up in value--
no one!
I know that Warren Buffet made billions by investing in the
stock market, so I guess he must be fairly good at picking stocks, but
he sure isn't sending me any mailings trying to get me to subscribe to
his stock picking service. Here's a little tidbit of information
that will help to make my point: There are professionals in this
country whose job it is to pick stocks for various trust funds, mutual
funds, investment conglomerates and so forth. These are
professionals who do nothing but eat, drink and sleep the stock market
all day every day. Some are able to pick stocks quite well, and
some actually end up losing their clients' money in the stock market.
My point is this: if you look at a list of the top five
stock pickers in the entire country, and then look at the new list five
years later, the lists will not be the same names. In other
words, the very top stock pickers in the entire country are never the
same ones five years later. If these professionals can't be
consistent for even five years, then what chance does some little stock
recommendation service really have? The only way anyone could
consistently and accurately pick winning stocks is if that person knew
for sure every political, financial and news event that would happen in
the future, and when those events would take place. You could put
all of your money in fast-growing oil stocks, for example, and have
news come out the next day that a new alternative fuel has been
invented and your stocks would plummet. Since no one can
accurately and consistently predict the future, no one can accurately
and consistently pick winning stocks. A stock recommendation
service or newsletter may work well for a while, but it will not be
able to keep it up indefinitely. And by the time such stock picks
begin to fail, your confidence may be so built up that you have huge
amounts of money riding on them. Stock recommendation services,
websites and newsletters do not work consistently over time. You
may win for a while, but sooner or later it all comes to an end and
often takes your money with it. Don't waste your time or money on
stock recommendation services. I have tried four or five
different ones over the time I was learning what I now know about the
stock market, and every single one of those eventually failed.
All of them ended up costing me money.
Margin trading
Margin
trading is when the broker with whom you have your account lends you
money using the stocks in your account as collateral. In other
words, for marginable stocks, you can borrow up to a predetermined
percentage of the value of the stocks. You then use this money to
invest in more stocks. You can invest it in the same stock
against which you borrowed, or in entirely different stocks. The
idea is that you can use the margin (borrowed) money to increase your
profits by buying stocks even though you don't have enough of your own
money to pay for them. For example: if I have $10,000 worth
of stock and my broker is willing to margin that stock at 50%, then I
can borrow up to $5,000 against that stock. I use that money to
buy more stocks and I now have $15,000 worth of stocks with only
$10,000 of my own money invested. For this privilege, the broker
charges me margin interest on the borrowed money. Since I now
have more stocks than I could have had without borrowing on margin, the
potential for increased profits is higher. If the stocks I bought
with the borrowed money go up and I sell them, then I pay back the
money I borrowed and have made a profit using someone else's money.
One of the things you need to understand is that you are not exactly using
someone else's
money. You are just borrowing money against your stock. No
matter what happens, you still have to eventually pay that money back.
Buying stocks on margin, selling them for a profit, paying
back the margin money and keeping the difference as profit is called
margin trading. The purported advantage of margin trading is that
it increases your potential profit, which it does; however, what too
many people fail to fully take into account is that margin trading also
increases your potential risk. The advantages of margin trading
are only there when the extra stocks you purchase go up. If your
stocks go down, margin trading becomes
nothing but disadvantage.
In the example I gave previously, if your portfolio collapses
completely, instead of losing the $10,000 you have in it, you lose
$15,000 since you still have to pay back the margin money. And
don't forget that margin interest is piling up on any unpaid money for
as long as it is unpaid.
Another disadvantage to margin trading
is the margin call. A margin call happens when the stocks against
which you borrowed the money decline in value. Since those stocks
were collateral for the margin loan, your collateral has just lost
value. To make up the difference, you have to either put more
money into your account to collateralize the loan, or pay back some of
the margin money. A margin call can happen suddenly and without warning at
any time. It could happen at the worst possible time when
you don't have any extra money to put into your account. If that
happens, the broker can sell any and all of your stock, even at a loss
to you, in order to pay off the margin call. If the stocks drop
in value so fast that even selling them doesn't satisfy the margin
loan, you are still responsible to pay back the money you borrowed
on margin--somehow.
These disadvantages of margin trading
make it a very, very financially dangerous practice. The amount
by which margin trading allows you to increase your potential profit is
nowhere near worth the increased risk. The way I see it, if you
have extra money to invest in stocks, then put it into your account and
invest it. If you don't have extra money to buy
more stocks, then don't buy more stocks. The only reason
that the average investor would need to use margin trading is if he
wanted to buy more stocks, but didn't have enough of his own money to
do it. Well, if he doesn't have enough money to avoid margin
trading, then he most certainly cannot afford the risk of margin
trading. The only way anyone should even consider margin trading
is if he has the extra cash to pay off the margin if necessary.
And if he has the money to do that, then he should use it and not
be borrowing on margin. Margin trading is very dangerous and can
ruin you financially very quickly. Never, ever use margin
trading.
I used margin trading once so that I would know
what I was talking about with regard to margin trading. I did a
very small margin loan just to make sure I wouldn't get into trouble.
I think I borrowed something like $200 on margin. Even at
that low amount, it was uncomfortable. The margin interest shot
up to 11% after I took out the margin loan, and that interest added up
much faster than I would have imagined. After a couple of months,
the whole concept of margin trading became too scary for me and I paid
off my margin loan. If I ran into that much trouble on a $200
balance, what might have happened to me if it had been a $20,000
balance? Never trade on margin.
Derivatives (put and call options)
Let's
start with the call option. When you buy a call option, you are
paying someone a relatively small amount of money for the right to buy
their stock at a set price. If the stock goes up, then you
exercise your option, buy the stock from them at the lower (set) price,
then turn around and sell it to someone else at the higher price.
You get to keep the difference as your profit. Let me give
you a very simplistic example:
XYZ stock is selling for $20 per
share. The call option to buy the stock at $20 is $1 per share.
So, for a total of $100, you have purchased the right to force
this person, whoever it may be, to sell you their XYZ stock at $20 per
share. All of this takes place on the electronic options
exchange, so you never really know who the other person is and they
don't know who you are.
Now, three months later, XYZ stock has
gone up to $30 per share. So, you exercise your call option and
force whoever the other person is to sell you their XYZ stock for $20
per share. They get to keep the $100 you paid for the call
option. You then sell the stock on the open market for $30 per
share.
So, you bought 100 shares of XYZ stock for a total of
$2,000 and sold it for a total of $3,000. Your profit is the
$1,000 difference minus what you paid for the call option (in this
case, $100) and minus any commissions and fees for the transactions.
The
advantage of the call option was that you only needed $100 to invest in
100 shares of XYZ, and not the $2,000 you would have needed to just go
ahead and buy the stock. Another advantage is that if the stock
goes under, you only lose the $100 you paid for the option, not $2,000.
If
XYZ stock had stayed at $20, or gone down, there would have been no
point in exercising your call option and the person from whom you
bought the call option would just keep your $100.
Probably the
biggest disadvantage of call options, or any options for that matter,
is that they are only good for a set period of time. It may be
weeks, months or even years. The longer the time, the more
expensive the option. After the set time period, the option
'expires' and becomes worthless--you lose whatever money you paid for
it. So, if the stock for which you bought a call option doesn't
go up within the set time period, you lose.
If you just buy a
stock outright, you can hold onto it forever if you need to until it
goes up enough for you to sell it and make a profit. If, on the
other hand, you buy a call option for the stock, that stock has to move
within the set time limit or you lose the money you paid for the call
option. Thus, not only are you trying to pick a stock that will
go up, you are trying to pick one that will go up in the set amount of
time. Just picking a stock that goes up is difficult
enough--knowing precisely when it will go up is nearly impossible!
That is exactly what makes call options so risky. Yes, you
may have a bit less money tied up since options cost less than the
stocks themselves, but you stand too good of a chance of losing
all of the money you invested. Besides, just because the
options are cheaper, doesn't necessarily mean that you will have less
money invested. Quite often, people still invest the same amount
of money, they just buy more options instead of fewer stocks. If
the stocks go down, your money is gone.
A put option works
exactly the same way, but in reverse. Instead of paying to force
someone to sell you a stock, you are paying to force them to buy it
from you at a set price for a set amount of time. With a call
option, you make money when the stock goes up. With a put option,
you make money when the stock goes down since you can buy it on
the open market at a lower price, and force the other person to buy it
from you at the higher option price. Put options are dangerous
for the same reasons that call options are dangerous--they can expire
worthless and you lose everything you had invested in the option.
A
lot of the stock market investing seminars teach people to use options
instead of buying stocks. In many ways, the risks are higher in
options than they would be just buying the stocks themselves.
Yes, the profit margin is higher when an option works out, but
the risk for loss is also much higher since options expire. Over
the longterm, average investors and many professionals lose
money by trading options. They are very risky, you have to know a
lot about them to even have a chance, and the market conditions can
take the value of options down usually much faster than with stocks.
Don't trade options and don't listen to anyone who tells you to
do so. They will tell you all of the good things about options,
but will tell you little or nothing about the downside. I traded
options for a while. I made a little bit of money on the ones
that worked out for me, but lost a lot more money on the ones that
didn't. Overall, I would have been much better off to have just
left that money in the savings account from which I took it.
Individual companies
Investing
in individual companies is risky just because you have all of your
investment eggs in too few baskets, so to speak. If one or more
of those baskets falls, you lose a lot of eggs all at once.
Publicly traded companies, such as Microsoft, Pfizer, Walmart,
McDonalds, etc. have stock available for purchase. When you
buy stock in only one, or just a few, companies, your money is only as
safe as that company. If the company is successful over time, you
can make a lot of money when your stock goes up in value. But,
when a company goes bankrupt, all of their stock can quickly become
worthless or nearly so.
That's the problem with buying stock in
just a few individual companies: if they go under, so does your
investment. Investing in individual companies is just a lack of
diversification. Diversification means your money is spread out.
If you own stock in 100 companies and one goes under, only 1% of
your portfolio is lost. If, however, you own stock in only three
companies and one goes under, 33% of your portfolio may be lost.
If you own only 2 companies, then 50% of your portfolio is gone.
And, if you own only one company, then 100% of your investment is
gone. Without diversification, the risk is just too high, not to
mention that it is gut-wrenching to watch a company struggle in which
you have all of your money. And the size of the company doesn't
really matter. Anyone remember Enron? The largest energy
company in the world, and it went under taking with it the portfolios
of thousands of people. Anything can happen: lawsuits,
natural disasters, loss of profitability, scandal or outright scams.
Any individual company can go under and its stock become
worthless. It happens every day. Don't risk your investment
money by having stock in only a very few companies. If you can't
afford to buy stock in at least 100 different companies, then you can't
afford to buy stock in individual companies.
Hot tips
Tips
on hot stocks and once-in-a-lifetime opportunities are dangerous for
the same reasons as I described for stock recommendation services.
Oftentimes, the tip is coming from someone who knows no more
about such things than you do, and possibly knows even less than you do.
If the tip is supposedly coming from some kind of professional,
then you have to ask yourself why they are giving stock tips instead of
just investing in the hot stocks themselves.
Hot tips that come
via email or the Internet are often what is called a 'pump and dump.'
Someone, or a group of someones, buys a lot of stock in a
particular company, usually a small, nearly worthless company, then via
the Internet and email tell everyone it is the latest hot stock
and they should buy it immediately. If enough people fall for it
and run out to buy the stock, the demand alone raises the price of the
stock. At that point, the person or persons who started the whole
thing dump their shares at the higher, pumped up price and make a nice
profit. Once the demand subsides, the stock plummets back to
where it originally was or even lower.
Hot stock tips don't
work and are often just a scam or an attempt to bolster the price for
the stock of a small, struggling company. Don't waste your time
and money chasing tips on hot stocks.
Borrowed money
Never,
ever borrow money to invest in stocks, or anything else for that
matter. Investing borrowed money may amplify your potential
profit, but borrowed money also amplifies the risk. If I invest
$10,000 of my own money and lose it, then I have lost $10,000.
If, however, I borrow another $40,000 to add to my $10,000 and
lose it, I have lost $50,000! My risk was five times higher just because
I borrowed money to invest.
I don't care what kind of borrowing
it is either. Whether it's against your home, or a margin loan,
or on a credit card, it is still borrowed money and still increases
your risk astronomically. I have even heard so called financial
experts tell people that equity in their home is just wasted money that
could be working for them instead of just sitting there doing nothing.
I guess mathematically it makes sense, but what is not being
taken into account is the risk. If I invest $5,000 of my savings
and lose it, then I have lost $5,000 from my savings. I can
fairly easily, eventually, recover from that. It would
not likely ruin me financially. If, however, I borrow
against my house and lose the money in a bad investment, I could lose
my house! At the very least I will be making payments for decades
just to get back to where I was. When it comes to borrowing money
to invest, there are a lot of people who will give you
some really bad
financial advice that could hurt you financially for the rest of your life.
Many people seem to think that they are financially clever by
borrowing, or telling others to borrow, in order to invest the money at
a higher interest rate. The risk of investing borrowed money is
just too high to be worth the potential return. Trust me, the
stock market is already quite risky if investing in stocks is not done
correctly--you don't need to be adding to that risk by investing
borrowed money in stocks, or anything else. It can be a tempting
idea to try to get rich by investing borrowed money, but don't fall for
it. It can cause you to struggle financially for years--maybe
even for the rest of your life.
Now the good news:
Now
that we have talked bout some of the dangers of stock market investing,
and some of the ways NOT to do it, let's now talk about the best ways
to go about investing in stocks.
Here's how to correctly invest in the stock market.
Invest for the longterm
Any
investment in the stock market should be longterm--five years or more.
If you are going to need the money in less than five years, then
don't invest in stocks. If, however, you are going to leave the
invested money alone for five, ten or even more years, then the stock
market can be a wonderful investment if you invest in it in a wise
manner. Here are what I consider to be the only truly wise ways
for the average, individual investor to invest in the stock market:
Mutual funds
Stock
mutual funds, sometimes called equity funds, are a great way to get
into the stock market. There are various kinds of stock market
mutual funds a few of which are listed here in order of most risky to
least. Even though I say risky, I mean compared to each other.
Any stock market mutual fund is safer than the things I described
above. From riskiest to least risky, they are:
Aggressive Growth mutual fund - Invests in small,
speculative companies with a potential for explosive growth and high
returns, or losses, on your investment.
Growth Stock mutual fund
- Invests in slightly larger companies which have a bit more stability,
but still a potential for good growth and return on investment.
Growth and Income mutual fund
- A mix of larger, well-known, stable companies and smaller,
high-growth companies. Returns are a bit lower, but so is risk.
Income and Equity Preservation mutual fund - Invests in large, stable, established, well-known companies with dividends and slow but steady growth.
Index mutual fund
- Invests in all of the stocks included in the index the fund is
tracking. In other words, a Dow Jones index fund buys shares of
all of the stocks in the Dow Jones average. A NASDAQ index fund
buys shares of all the stocks in the NASDAQ stock exchange. The
S&P 500 index funds buy shares of all of the stocks in the Standard
and Poor's 500.
Mutual fund companies and brokers have many
different individual funds which fall into these basic categories.
You want to find a mutual fund of the type you have chosen, which
has had fairly good returns over at least a ten year period.
Don't buy into a newer fund just because the current returns are
high. Remember, stock investing is for the longterm. To
find someone you can trust to help you find the best stock mutual funds
for your needs, I recommend clicking on 'ELP investing' under 'Trusted Services' at
Daveramsey.com.
Mutual
funds are a fairly safe way to invest in stocks simply because of the
diversification. Each fund owns hundreds of stocks so that your
money, no matter how little or how much it may be, is spread out over
hundreds of different companies. Historically, stocks have
returned an average of ten to twelve percent per year. That may
not be as much as some of the risky investments I have mentioned, but it is
all you need to get ahead and eventually become wealthy. Remember
that this is an average. Your mutual fund may make money one year
and lose money the next; but, over time it will average out to a ten to
twelve percent annual return historically.
Exchange Traded Funds (ETFs)
Exchange
Traded Funds, or ETFs, are basically just mutual funds that trade like
a stock right on the stock exchange. You can put in orders to buy
and sell ETFs just as you would any stock. Many of the same
privileges you would have with an individual stock, you also have with
many ETFs. For anyone who is just totally addicted to the thrill
and excitement of investing in the high energy, fast paced world of
stocks, an ETF might be the way to go. They go up and down daily,
just like a stock, sometimes by quite a bit. Since ETFs trade
just like a stock, you can use many different stock-type strategies in
buying and selling them. You buy and sell ETFs through any stock
broker just as you would buy and sell stocks. ETFs are so much
safer than individual stocks because the ETF holds many stocks at the
same time. An ETF can be made up of dozens, hundreds, or even
thousands of different stocks. ETFs move much more slowly than
individual stocks, but they move faster than mutual funds, and the
diversity inherent in ETFs makes them a lot safer than individual
stocks.
A little bit of speculation
If
you want to have a little fun, and you insist on trying some of the
fast-moving hot stocks, then do it with no more than 5% of your
investment money. Take 5% of the money you have available for
investing and use that money, and
only
that money, on the more speculative investments. If you get lucky
and make some gains, move about half of that profit back into your regular investment
account and continue to speculate only with the money left. Now
this is important: if you should lose that 5% in investments that
go bad, you stop speculating and just do the safer and more
conservative investments from then on.
Do not
add more money to it and try again. If you lose that original 5%,
then you have proven that you are not good at speculative investing and
that alone should be reason enough to stop high-risk, speculative
investing and just stick with what works.
If you can't lose it, then don't!
Short
but sweet: if you can't afford to lose it, then don't invest it!
That's why you shouldn't invest borrowed money, or invest every
penny you have in savings, or invest the equity in your home.
There is always a chance for loss in the stock market and if that
happens, you don't want it to take you out financially. That is
also why as you get closer and closer to the time that you will need
the money you have invested, you will want to adjust your portfolio for
less risk. You don't want to lose your entire nest egg the year
before you're supposed to retire.
This doesn't mean you can only invest money you are
willing to lose--no one
wants to lose money--it just means not to invest money that would financially devastate you if you lost it.
If you insist, then paper trade first
If
all of this has not convinced you, and you insist on breaking any of
the guidelines I have given you, then do paper trades first. Paper
trading is where you give yourself an imaginary amount of money
comparable to what you might really, one day, have to invest and keep
track of imaginary stock trades on paper. In other words, you
follow real stocks and real companies, but you write down your trades
instead of actually making them with a broker. Any imaginary
profit you make is added to the amount of imaginary money, and any
losses are subtracted. Be sure to include at least $50 worth of
commissions each time you make a trade, and subtract it from your
total. You are not allowed to add money to your imaginary account
except by earning it in your trades.
This exercise is a great
way to learn without losing any real money. Do it for at least a
couple of years before putting any real money into it. I think
you will be surprised at how well some things work out, and how poorly
others do. If after a couple of years, your paper trades are really
going well, then take no more than 5% of what you have put away in
mutual funds and ETFs and use it as you would your speculation money.
A final thought:
The stock market can be a great place to get a nice return on your investment. It can also be a great place to
lose
your investment. There are some really great opportunities to
make money investing in stocks, but only if you do it the way I have
taught you in this article. If you are a beginer stock market
investor, especially if you have no money to invest, please get a copy
of my
eBook Investing With Nothing: How to get started in stock market investing with no money to invest.
This article copyright
© 2008 by Keith C. Rawlinson
(Eclecticsite.com). All rights reserved.
This article may be
copied for non-profit use including newsletters, bulletins, etc.
as long as you
first get written permission from the author and full credit is given
which includes the author's name
and the name of this website.
