10 things you need to know before entering stock market

Even though, we all know that investing your money is the most reliable way to create wealth over time, however, I think it might surprise you to learn that a $10,000 investment in the S&P 500 index 50 years ago would be worth nearly $1.2 million today. Stock investing, when done well, is among the most effective ways to build long-term wealth. If you’re new to the investing world, we’re here to help you get started. It’s time to make your money work for you.

Before you put your hard-earned money into an investment vehicle, you’ll need a basic understanding of how it works.

1. Determine your investing approach

The first thing to consider is how to start investing in stocks. Some investors choose to buy individual stocks, while others take a less active approach.

You can invest in individual stocks if -- and only if -- you have the time and desire to thoroughly research and evaluate stocks on an ongoing basis. If this is the case, we 100% encourage you to do so -- it is entirely possible for a smart and patient investor to beat the market over time.

In addition to buying individual stocks, you can choose to invest in index funds, which track a stock index like the S&P 500. Or you can invest in actively managed funds that aim to beat an index.

On the other hand, if things like quarterly earnings reports and moderate mathematical calculations don't sound appealing, there's absolutely nothing wrong with taking a more passive approach.

The bottom line is that there's no one-size-fits-all best way to start investing in stocks, so it's smart to research your stock market investment options and see which sounds most appealing to you.

2.Establish a ballpark asset allocation

Now let's talk about what to do with your investable money -- that is, the money you won't likely need within the next five years. This is a concept known as asset allocation, and a few factors come into play here. Your age is a major consideration, and so are your particular risk tolerance and investment objectives.

Let's start with your age. The general idea is that as you get older, stocks gradually become a less desirable place to keep your money. If you're young, you have decades ahead of you to ride out any ups and downs in the market, but this isn't the case if you're retired and reliant on your investment income.

Here's a quick rule of thumb that can help you establish a ballpark asset allocation. Take your age and subtract it from 110. This is the approximate percentage of your investable money that should be in stocks (this includes mutual funds and ETFs that are stock based). The remainder should be in fixed-income investments like bonds or high-yield CDs. You can then adjust this ratio up or down depending on your particular risk tolerance.

3.Open an investment account

All of the advice about investing in stocks for beginners doesn't do you much good if you don't have any way to actually buy stocks. To do this, you'll need a specialized type of account called a brokerage account.

These accounts are offered by companies such as TD Ameritrade, E*Trade, Charles Schwab, and many others. And opening a brokerage account is typically a quick and painless process that takes only minutes. You can easily fund your brokerage account via EFT transfer, by mailing a check, or by wiring money.

  1. Choose your stocks

Now that we've answered the question of how you buy stock, if you're looking for some great beginner-friendly investment ideas, here are some advises to help get you started.

Of course, in just a few paragraphs we can't go over everything you should consider when selecting and analyzing stocks, but here are the important concepts to master before you get started:

  1. Diversify your portfolio.
  2. Invest only in businesses you understand.
  3. Avoid high-volatility stocks until you get the hang of investing.
  4. Always avoid penny stocks.
  5. Learn the basic metrics and concepts for evaluating stocks.

 

5.Buy Low, Sell High

We all invest for the same reason -- to make money. And to make money investing, we need to know two key things: when to buy and when to sell.

You do not have to be an expert to make money investing in the Stock Exchange. You have to develop the skills to understand the market and buy when the stock is low and sell when the stock is high.If you can buy something for $1 and turn around and sell it for $2, you've made money. If, on the other hand, you buy something for a buck and can't find someone willing to take it off your hands for more than $0.50, you've lost money. Clearly, to make money at investing, the goal is to buy low and sell high.

How to do that, once you've figured out what a company is really worth, its margin of safety will tell you when it's time to buy and when it's time to sell. The lower a company's price with respect to that intrinsic value, the stronger the margin of safety, and the better the chance that buying that company will lead to a profitable investment. The higher a company's price with respect to intrinsic value, the more that margin of safety has been reversed, and the better the chance that it's time to sell your position and take the extra profits from your bargain-hunting trip.

6.There Is No Such Thing as A Sure Thing

A word to the wise: the conventional wisdom isn't always wrong, but it frequently has terrible timing. Some of the stock market's best investors over the long term- Warren Buffett, Carl Icahn and their ilk-have placed their biggest bets on companies out of favor or during times of market stress.

While long-term gains for stocks at large have historically been a safe bet, individual companies are inherently riskier.

7. Get Familiar with Filings

While some investors might think they have a sixth sense for finding good companies, the rest of us have to do our homework. There's no better starting point than the regular filings public companies make with the SEC, which are required to detail everything from company finances to potential conflicts and risk factors.

The annual 10-K includes the most information, ranging from quarterly and annual financial numbers to descriptions of business lines and management commentary on growth opportunities and costs. Regulatory filings will also detail any senior management changes, acquisitions, and stock transactions by executives or board members.

All filings for U.S. public companies, and foreign companies that list on U.S. exchanges, can be found online through the SEC's EDGAR system.

8. Think Long Term

Better opportunities come when a stock or sector is dismissed by the market and languishes despite steady economic results that will produce a long stream of profits. Transportation stocks like airlines and railroads have gone through long out-of-favor stretches, only to churn out considerable gains when economic conditions and industry dynamics align.

Years of mismanagement in the airline industry led to a string of bankruptcies in the 2000s, but the resulting merger wave made American Airlines, United Continental and Delta Air Lines more competitive and poised to benefit from trends like plunging fuel costs.

9.There Is No Perfect Metric

Professional and amateur investors alike have their favorite measures of growth and value, from price-earnings ratios to dividend yields and profit margins. But there is no single number that divides good stocks from bad ones. A stock that looks cheap at 10 times earnings can go to 5 times in a flash, and a flashy tech startup that looks pricey at 3-time sales can easily jump to 6 in a heartbeat.

 

10. Know What You Need, And What You're Paying For

The evolving brokerage industry is a beehive of competition to offer the latest and greatest trading options, but for most investors the basic essentials can be found anywhere.

 

Make sure you know the type of buy or sell order you're entering. A market order, for instance, will be executed as soon as possible, whatever the prevailing market price; a limit order by contrast will only complete the transaction within price parameters you've established.

 

(Images from the internet)