Making money is the stock market is easy if you can just follow one simple piece of advice: Buy low, sell high. Of course, that advice is far easier said than done. While fortunes can be made or lost overnight in the stock market, creating wealth typically requires planning, patience and a long-term commitment to sound investing principles.
Nobody else in the world is just like you, so it follows that there is no one-size-fits-all investment plan that works for everyone. Before you make your first investment in the stock market, sit down and do an honest self-assessment. Determine how you relate to money and how much risk you feel comfortable taking. The best stock market investment in the world does you no good if you can't sleep at night worrying whether it will lose money.
If you don't care where you end up, any road will get you there. It's the same with your investments. You must know where you want to end up financially before you can make a decision about the proper investment to achieve that end. It doesn't matter if your investment objective is to create current income, to preserve your capital or to generate tax-free interest, as long as you know what your investment objective is.
Determine Your Starting Point
You can't get to Point B from Point A if you don't know where Point A is. Where your investments are concerned, Point A is your current financial situation, or your starting point. Determine your financial starting point by creating a net worth statement. A net worth statement is a two-column form with all of your assets, the things you own, in one column and all of your debts, the things you owe, in the other. Total each column, then subtract your debts from your assets. Whatever is left is net worth.
Determine Your Resources
If you have a positive net worth, you might have assets that you can use to invest in the stock market, but many of your assets might be tied up in your home or other investments that are not readily accessible. Other resources for investing might come from your regular cash flow. Determine your cash flow by creating a cash flow statement. This is a two-column form with all of your monthly income from all sources in one column, and all of your monthly expenses in the other. Total both columns, then subtract your expenses from your income. Whatever is left is your cash flow. If the result is a positive number, you have disposable income that you can use to invest in the stock market.
Find a Broker
Most stocks are traded through major investment exchanges or over-the-counter. In either case, you need an investments broker to handle your stock transactions. If you don't feel confident in your ability to make your own investment decisions, you might need the services of a full-service broker. This is the most expensive way of trading stocks. If you want to go it alone, you can trade through an online brokerage firm. Some companies allow you to bypass a broker altogether by investing in their direct stock purchase plans. A number of mutual fund companies offer their shares directly to the investing public as well. This is the least expensive option. In between are discount brokerage firms that provide limited services and charge discounted fees and commissions.
Know Your Investments
Whether you do your own research or rely on the services of an investments professional, you should have a clear understanding of how the investment you are buying works. Never invest in anything that you don't understand.
Diversify Your Investments
The bedrock of investment advice is, "Don't put all your eggs in one basket." In other words, diversify your stock holdings, so if one stock craters you don't lose all your money. There is no better long-term risk management strategy than diversification of your stocks, says the U.S. Securities and Exchange Commission.
Don't Marry Your Stocks
It can be easy to get emotionally attached to a particular stock, especially if that stock has done well for you over a number of years. But there might come a time when it is advisable to sell that stock, either to lock in a gain or to cut your losses.
Cut Your Losses
The stock market fluctuates, both up and down. While there is no need to panic if your stock investment takes a slight dip in market price, you need to have a plan in place to cut your losses if the trend continues downward. Marketing hype to the contrary, there is no tried-and-true method of timing the market. If you don't have a predetermined loss threshold, you could find yourself chasing the market down and end up selling at the bottom.
Get Started, Don't Stop
Investing in the stock market is a lot like driving on ice. The best advice is to get started and don't stop. Time is your greatest ally or your biggest enemy. The sooner you get started, the more wealth you can accumulate, but it takes time. Investors who consistently invest in the stock market and are willing to leave their money in the market for long periods of time -- 15 years or longer -- tend to earn strong, positive returns, reports the SEC's website Investor.gov.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.