have a plan
Before investing in the stock market, create an overall plan of what you are trying to accomplish. Set financial goals and determine how much time you have to reach them. Taking your tolerance for risk into account, decide how much money you need to invest every month and the mix of investments you want to maintain.
Here are some common sense guidelines for investing in the stock market successfully and avoid common mistakes:
Diversify
Divide your money among different types of investments to reduce your risk. Have a balance of different types of investments in a variety of companies and industries.
Research before you invest
Research is critical to investing in the stock market successfully. Always do research before investing. Most online brokerages offer research and financial news in addition to stock and mutual fund quotes. Base your decisions to invest on facts, not emotions. Be as objective as you can about the risks and potential rewards. View “hot tips” about investments with skepticism. Always do your research.
Buy low and sell high
Selling an investment for more than you paid is how you make a profit. The idea is simple, but it’s a challenge to do it consistently. The historical trend of a stock’s price may help indicate what might happen in the future, but there are no guarantees. When you research possible investments, experts recommend that you focus on the investment’s objective (in other words, whether the goal is to give investors income, growth, safety, or some combination of the three), risk profile, and how well it fits into your overall portfolio. Try to avoid buying a stock at its high point. Look for opportunities to buy stocks with good potential at low prices after a major market downturn.
Buy and hold
Some investors overreact to news items they read or “hot stock tips.” They start trading all the time, and/or buying and selling investments very quickly in an attempt to make quick gains. These strategies rarely work and can put you in serious danger of losing your money. Stay objective and focus on the long term. Be an investor, not a gambler. Avoid the impulse to react to sudden changes in the market or to buy the latest hot stock.
Decide when to sell
One of the keys to successful investing in the stock market is deciding when to sell investments that are doing poorly as well as those that have increased in value. Most professional investors set strict guidelines for themselves regarding the specific price, either high or low, at which they will sell. To cut your potential losses and maximize your gains, consider adopting the same approach. Review your portfolio on a regular basis to see which investments have significantly increased in value, which have dropped, and whether the time to sell is now. You may also want to consider the tax consequences of selling a particular asset at a particular time.
Pay attention to costs
Taxes, fees, inflation, and other costs can all affect your return on an investment. It’s wise to consult with an investment professional and your tax adviser regarding the best way to minimize these costs.
Keep track
Whether you trade online or invest though a professional, it’s important to keep track of your investments. A fast and convenient way is through online account access offered by many investment brokerage companies. This service allows you to view balance and transaction information, transfer money, contact customer service, and more. It’s usually provided for free.
Understand market and limit orders
Unlike most things you buy, the prices of most stocks change very frequently. This means you need to tell the broker, the person or company handling your transaction, the price you agree to pay. Market orders are filled at the price a stock is trading when the order is received. If the stock price is volatile that day, you might pay more than you planned to. With limit orders, you set the buy or sell price, but you run the risk of not getting your order executed. Review your broker’s trading guide before getting started to be sure you pick the order type that’s right for you.
Be accurate
If you trade online, make sure you type accurately. Check and double-check the order you type in. Have you entered the right stock symbol and number of shares? If you’re rushed or distracted, you could make a serious mistake.
Stick with your plan
Periodically review your investing plan so that you don’t lose sight of your goals. Adjust your portfolio as needed to maintain the mix of investments you want at your target level of risk.
The material provided above is for information only and is not intended to provide specific investment advice to any individual for any particular purpose. For advice related to your personal situation, you should consult an investment and tax professional.
The information contained herein is being provided as-is and without representation or warranty. The enclosed information is not intended as legal, tax or financial planning advice. Any discussion of tax or accounting matters herein (including any attachments) should not and may not be relied on by any recipient or reader. The recipient/reader should consult their tax adviser, legal consultant and/or accountant for a statement of tax and accounting rules applicable to their particular situation and for all other tax and accounting advice.
ways to invest in the stock market
There are many ways to invest in the stock market. A few common ways are listed below.
When you invest in stocks, you’re investing in businesses. These could be small, medium, or large companies in the U.S. or around the world. Buying stock gives you part ownership in a company. That’s why you should only buy stocks in companies you believe in — and believe can do well. Each stock carries its own specific risks.
Mutual funds allow you to pool your money with others in a professionally managed portfolio. You are purchasing shares of the overall fund rather than actual shares of the individual underlying investments. Mutual funds can offer diversification through a mix of stocks, bonds, and other investment types with varying amounts of risk and investment objectives.
ETFs are investment products holding a basket of assets. Some ETFs are designed to track the performance of a specified index, sector, or commodity. Others are actively managed. ETFs trade like stocks on an exchange. When you purchase an ETF, you are purchasing shares of the overall fund rather than actual shares of the individual underlying investments. ETFs carry the risk of their underlying investments and there are no guarantees that they will meet their stated objectives.
Risks and rewards
Money that is invested in the stock market can have a great potential for growth, but stocks can be risky because their value can change from day to day. There are no guarantees of a profit.
your portfolio: conservative or aggressive?
In general, stocks have greater potential for growth and total return compared to bonds. On the other hand, bonds offer greater potential for stability and income compared to stocks. For this reason, most financial advisors agree that a portfolio more heavily weighted with stocks is more “aggressive” and one with more bonds is more “conservative.”
Review the different types of portfolio mixes:
| Type of Portfolio | Mix of Stocks and Bonds |
|---|---|
| Conservative | 20% Stocks | 80% Bonds |
| Moderately Conservative | 40% Stocks | 60% Bonds |
| Moderate | 65% Stocks | 35% Bonds |
| Moderately Aggressive | 80% Stocks | 20% Bonds |
| Aggressive | 100% Stocks |
Note: Ask an investment professional to help you create a portfolio that best meets your goals, timeline, and risk tolerance.
minimize investment taxes
The following are some specific federal tax considerations. It’s important to note that tax rates change periodically. For the most current information, visit the Internal Revenue Service Web site at www.irs.gov. In addition, state taxes may apply. Visit your state government Web site to learn more.
Taxes are complicated. The more you know about taxes related to investment activity, the better able you will be to manage your tax costs. Money you can save in taxes is money you can keep invested for your future. As with any other type of investment, tax liability may differ from individual to individual, depending on your own personal circumstances.
