If you don’t know about the stock market and are trying to learn about it, you are most likely to experience a severe case of information overload.
Do a Google search for “stock market education” or “learn the stock market” and you’ll be literally inundated with information. The same holds true if you look an Amazon or walk into a brick-and-mortar bookstore. The choice of books for stock market beginners is simply astounding.
In part, the reason why there’s such an abundance of information on the stock market is because of the interest many people have in it. There’s a market, and publishers try and cash on it. But on the other hand, there also is a lot of information to offer on the stock market. No single book can give you all the information you need.
As a beginner in the area of stock market investing, what must you do? The first thing you must realize is that a very well-written book about the stock market can be totally useless to you if it’s inappropriate for your knowledge level.
You need to accept you’re a beginner and go for a beginner’s book or a website that caters to beginners. After you’re absorbed that information, you can go back and look for more information that is better suited to your new knowledge level.
Nevertheless, you need to at least have some very basic knowledge. The stock market is nothing but a platform where shares of publicly traded companies are bought and sold. A share of stock is a claim of ownership in a given company: if you own a share of stock, you are entitled to a return on your investment if the company is profitable.
A publicly traded company is one where the shares are sold to the anyone who wishes to buy them, as opposed to a private or a family company, where the shares are not sold to the public at large.
But there’s a great advantage to being a stock market beginner in current times. Because of the advent of computers and the internet, you can learn, build a paper portfolio, and follow “your” portfolio to see how it performs. The purpose of this exercise is to get you into the mindset of an investor without taking on the risk.
As you’re learning and getting more comfortable with the investment world, you can consider getting a brokerage account so you can begin investing. Make sure you’re aware of the requirements and terms of the account you will sign for, as well as the fees you will be charged.
One word of caution, though. Many people get involved in the stock market expecting to make a fortune in a short amount of time. Those are the people who fall for the first get-rich-quick scheme that is offered to them. Very educated people have entered the stock market and failed miserably. If you think making money in the stock market is going to be a walk in the park, you are mistaken.
Your best bet is to go for the long term. All the investing greats (Warren Buffett, Peter Lynch, and so on) emphasize that long-term investing is the way to go. Over a short period of time, the stock market is just too unpredictable, but as your investing horizon lengthens, the likelihood of losing money decreases.
Over 25-year periods, the stock market has always produced positive yields. So if you buy some stocks in solid companies with good fundamentals and hold on to them, chances are you’re achieve decent returns.
Another good rule about the stock market for beginners is the need to diversify your portfolio. Simply put, your likelihood of losing money decreases as you invest in a broader spectrum of companies.
Of course, there are such things as bear markets, where stock values plummet across the board. But generally, when you diversify, your losses in one company or industry stand a better chance of being offset by gains in other companies or industries.