The stock market is a very lucrative market. For beginners, it can be a daunting task to invest in it without any in-depth knowledge.
Determining Your Risk Threshold
Before you jump in and try to make the big money you usually hear from other successful investors, you have to slow down and think about what kind of investor you are. Do you consider yourself a risk-taker? Or do you prefer to bet on the guaranteed investments?
Imagine how you would respond to a 10-percent slip in a single stock in one day or a 35 percent drop over the period of a few weeks. Do you think you’d be rushing to sell your stocks?
Your answers to these and other similar questions will result to you considering different types of equity investments, like mutual or index funds against individual stocks.
If you feel uncomfortable with risks but you still want to invest in stocks, your best bet would be mutual funds and index funds, which are well-diversified and hold a lot of different stocks. This decreases risks and doesn’t need individual stock research.
Time and Interest (Commitment)
Are you planning to invest in only funds, only stocks, or both? It will be rolling on how much time you want to allocate to this career. The selection of mutual or index funds will require you to only invest your money. The hard task of picking stocks will be left to the fund manager. Meanwhile, index funds are much simpler since they move up and down according to the type of company, industry, or market they track.
Meanwhile, individual stock investing is the most time-consuming since it needs you to make judgment about management, earnings, and future prospects of the company. Since you are the investor, you are trying to differentiate between money-making stocks and financial catastrophes. You have to know what they do to make money, the risks, and the future outlook and much more.
In other words, you need to ask yourself how much time you are willing to commit to investing. You may choose to spend only a couple hours of a week or more. Investing is a skill that takes time to develop.
Diversification
It is always better not to be exposed to only one kind of asset. Putting all your money in one asset gives you the chance to gain a lot if the security performs well. However, if it fails, then you lose all your money.
You should diversify across several different sectors like real estate, consumer goods, insurance, commodities, and others. It’s better for you to focus one, or two, or three. You can also consider diversifying across asset classes by keeping some money in some bonds and cash instead of just being 100 percent on stocks.
A Beginner’s Portfolio
If you want to invest in individual stocks, you can get a portfolio of 12 to 20 well-chosen ones. They would be enough to provide plenty of diversification. There would be not too many companies to follow.
On the other hand, you have to ensure that you fully understand each company’s business and risks, among other things.
If you want to invest only in stocks, you have to make sure that you spread your funds across different sectors like healthcare, tech, small cap, and big cap.