Basics of Stock Investing

Use volatility to your advantage.

When you invest in the stock market, you become part owner of some of the biggest and most well known companies in the world. But before you start investing in the stock market, you should take some time to educate yourself about the basics of investing. Stock market investing does have somewhat of a learning curve, and being prepared for the volatility and changes can make you a better investor.

Pay Yourself First

Many new investors find that they simply do not have any money left to invest once all the bills are paid. You can turn this around and force yourself to save by using the pay-yourself-first approach. With this approach, you simply treat your investments like you would any other bill, and you pay money into your favorite investment at the beginning of every month. You can start as small as you like; the most important thing is to get started.

Dollar Cost Average

Dollar cost averaging simply means that you put the same amount of money into the stock market each month, regardless of whether stocks are up or down. This strategy works particularly well for mutual funds, since you can set up a monthly transfer that moves money from your bank account to the fund. Over time this strategy allows you to accumulate more shares of the fund when prices are low and fewer when the market is at-all time highs.

Diversify Your Holdings

Diversification is very important when investing in the stock market, since the fewer securities you hold, the greater your overall risk. If you hold one stock and the company goes bankrupt, you could lose 100 percent of your money. But if you hold 100 stocks and one goes bust, you would lose closer to 1 percent of your funds. One of the best ways to diversify is with mutual funds, since those funds pool the investments of many people and use the money to buy a widely diversified basket of stocks.

Keep Your Costs Low

Every dollar you spend on investment expenses is one less dollar you have to invest, so keeping your investment costs low is critically important. When you are evaluating mutual funds, you should look at the performance, but you should look closely at the expense ratio as well. If you want to keep your costs as low as possible, you can invest in index funds. These funds do not hire expensive money managers to try to beat the market. Instead, they simply hold all of the stocks in the index they track. Over time these funds have had an excellent track record against their more expensive counterparts, making them a good core holding for many investors.

References

• Department of Labor: Easy Ways to Save
• Securities and Exchange Commission: Index Funds