Stock Market Tips For Beginners: How To Build Investing Experience

September 17, 2009 by Jacques Sprenger

These stock investing tips focus on the successful investor’s mindset, attitude and behavior.

Reminiscing from my failed experiments in investing, I realize now that I fell victim to two types of emotions: Arrogance (I thought I knew what I was doing), and Excitement (I believed I was going to solve my financial problems with a couple of master strokes). Instead, more than 20 years ago, I lost my life savings. That is a lesson I never forgot and hope that nobody else has to learn the hard way.

stock market tips, beginners
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Different Ways To Invest: Where Do You Put Your Money?

In the high school where I teach, business students are busy working their online brokerage accounts, playing the stock market game by “investing” thousands of dollars in stocks of their choice. In many cases, these humble students have done better than many of the so-called expert financial gurus. They of course did their homework on all the companies they selected, learning about P/E, dividends, ROI and cash reserves.

Most people will not take the time to really analyze the trends and historical records of the businesses they invest in. A few will be happy to put their hard-earned money in index funds, so called because they “..track various asset classes rather than trying to pick the winners in each.” Their risk is minimal and their returns coincide with the markets. And then we have the hedge funds: “One problem with hedge funds is that they appeal to all the wrong instincts. They are for the privileged. Investors need to have a minimum net worth to qualify.” Madoff was able to attract so many wealthy investors to his “hedge fund” by appealing to their vanity: “You are special, Jim, rich people like you have access to ‘financial secrets’ that are not available to the common public.”

Simple Stock Market Tips For Beginners

In these difficult economic times, many “burned” investors who lost 50% of their capital in, for example, 401Ks and/or stocks, want to recoup their losses by taking high risks. If you are planning to return to the market or want to begin a new relationship with a discount broker, then you should follow these common sense rules:

investment rewards
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Rule #1 Balance Risk and Reward. “Rome was not built in a day,” says Fari Hamzei in his book “Master Traders.” Successful investors spend a lot of time studying trends and recent news regarding specific areas of the economy. They will, like Warren Buffet, avoid gambling on hunches and they will put their money into a stock, ETF or mutual fund only after a very careful analysis. Even so, their balance remains on a general upward trend despite the fact that they get “burned” from time to time.

Rule #2 Stay Humble. As I mentioned above, I was sure I had the winning ticket when a prestigious company announced the emission of a new set of shares, something akin to Google’s initial offering. I could hardly contain my excitement; even my spouse wanted to celebrate ahead of time. Not long after, the market crashed taking with it my investment, which quickly eroded into one tenth of its initial value (instead of turning into the ten bagger I was sure it would be).

Rule #3 Be Cautious About High Risk Investments. It bears repeating: if you are convinced about making a high risk investment, make sure you use only capital you can afford to lose. Usually this means between 1% and 10% of your monetary assets (preferably 5% or lower). Yes, this is a good time to take such risks, as financial experts have indicated that the economy may be on the rebound and many valuable shares are currently underpriced. For small amounts of money, you can make an exception to Rule #1: for example, my nephew invested in General Motors when the stock was at almost nothing: $0.30. He then sold it a few months later for $1.00, a nifty profit indeed. Risky? Yes, a bankrupt business is hardly recommendable; but it was GM, an American icon, and he had a strong hunch that the government would not abandon it.

Rule #4 If You Fall, Get Up. So you had some crashes and lost some money; but more importantly, what did you learn? That’s called experience, friends, and there is no substitute for it. Apply your hard-earned lessons and go make a buck or two. In the long run, as you already know, the market (with the help of a diversified investment portfolio) will give you the best rewards.

All the above is of course, for the younger generation; if you are over 50, like me, play it safe and stick to index funds and municipal bonds. You won’t be getting outrageous returns but at least you’ll sleep well at night and you’ll have a more stable portfolio. The young ones can afford to lose some money; they’ll have a lifetime to compensate and build on their experiences. Heck someone among them may even turn into the next Warren Buffet!

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