How to Play the Stock Market

Playing the stock market is actually pretty serious business. While the rewards can be great, there is often potential for substantial losses that can be financially crippling if the investor has not covered all his or her bases properly. Here are some simple steps that can help make the process of investing in the stock market a more fruitful endeavor.

Instructions

Difficulty: Moderate

1. Set your limits. This means understanding your current financial condition and investing no more than you can comfortably afford to lose. The point of investing is to make life better, not put yourself in a financial bind. By setting limits on how much you contribute to investments on a monthly basis, you safeguard against finding yourself in an awkward financial position.
2. Understand the way buying on margin works before you buy. While this looks like a great option on the front end, it is important to make sure you have enough assets to back up the activity. Talk to your broker extensively about what type of margin you qualify for and what happens if the margin is called.
3. Educate yourself on basic investment terminology. You need to know the difference between a bull market and a bear market, how to map past performance trends, and what constitutes a put or a call. Knowing the terminology will help greatly when conferring with your broker on various investment opportunities.
4. Learn how to read market conditions and do your own forecasts. While your broker will usually prepare a projection when discussing the feasibility of buying or selling a particular stock, it never hurts to take a look at the situation yourself. Knowing how to put together your own forecast may help you think of relevant questions to ask your broker, as well as provide you with more evidence that a given investment approach is the right way to go.
5. Combine your instincts with your knowledge. The stock market can be a volatile place. That is, stocks do not always perform in the manner projected based on today’s assumptions about the future. Playing a strong hunch that had little to no support from projections and mathematical calculations has made more than one fortune. While relying solely on instinct would be dangerous, do not rule out the possibility that a hunch could pay off.

Tips & Warnings

• Vary the contents of your stock portfolio a little. By holding shares that relate to different types of businesses, you insulate yourself from declines that may occur in some industries by taking advantage of increases that take place in other industries.
• Never try to present yourself as being better informed than you really are. This approach makes it harder to ask the right questions and make informed decisions about investments.