The most commonly heard and repeated rule of investing is always “buy low and sell high”. It seems if that's all there was to it, everyone would be able to make a fortune in the stock market! Even though it is the most widely used piece of investment advice, the biggest mistake that investors make is to buy high and sell low – because just knowing the basics isn't enough – you need to be able to make sense of it, too.
Here are 3 tips for beginning investors:
1)Don't Try to Trade (Buy/Sell) Too Frequently
In other words, choose long term investment options, to give your stocks the chance to increase value. Even the best stocks have ups and downs in terms of their value, and even the most successful investors can't consistently predict whether or not a specific stock will increase or decrease in value day after day. When you look at stocks over a longer period of time though, most of them will increase in value, making sure you follow the cardinal investment rule of buying low and selling high. When you try to time the market and listen to everyone's stock tips about a certain stock rising or falling, most of the time you will be buying high and selling low.
Another benefit of choosing to invest over the long term are the tax benefits. If you buy a security and keep it for less than a year before you sell it, you will pay regular income tax rates on any of the capital gains it may have made. If you hold on to a security for more than a year, than you will only pay 15% tax on the capital gains.
2)Don't Put All of Your Eggs into One Basket
We've all heard the amazing success stories of people who have invested all of their money into one stock and woke up the next day to double or triple their investment – but more often than not, when you don't diversify, you'll wake up to find your entire investment gone. Diversification is key to reducing your risk when investing. When you put all of your money on the hope of a single company, you could discover that a company doing well today files bankruptcy tomorrow, and you've lost your investment. Diversifying, and spreading your money across stocks from a number of different companies and industries reduces your risk – all of the companies would have to fail in order for you to lose all of your investment.
Diversification can also mean spreading your investment out across more than just stocks. Most people keep a portfolio of stocks, bonds, IRAs, money market deposit accounts, and high interest savings accounts to further reduce their risk and balance their portfolios.
3)Keep an Emergency Fund and Don't Invest More Than You Can Afford
Another common mistake new investors make is to try investing too much of their money – and then finding out they don't have access to cash if an emergency happens. Before you begin investing into stocks or other methods that are not easy to pull your money from when needed, it's wise to establish an emergency account in a high interest savings or other form of liquid account. This will give you access to cash in the event of an emergency. Once you have an emergency fund established, you can then focus on determining how much money you can afford to investment.
The information in this article is certainly not ground breaking, but for new investors, these tips can make the difference between earning a return and losing your investment.