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What are the Best Tips for Stock Market Beginners?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 26 July 2019
  • Copyright Protected:
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Stock market beginners need to concentrate on the fundamentals of stock investment, rather than worry about fancy strategies or chasing extremely high returns. These fundamentals include understanding the costs of trading and assessing the potential losses. There are also several strategies suited to beginners, such as diversification, tracking a market, and value investments.

The absolute number one rule for any stock market beginner is to never invest any money you cannot afford to lose. It is exceedingly unlikely that every company you invest in will collapse, leaving its shares worthless. It is, however, very likely that at least some of the stocks you invest in will fall in value and that you may be forced to take a loss. There's no real way of knowing the extent to which this will happen, so working on the basis that you could cope with the worst case scenario is the safest option.

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Stock market beginners should remember the value of diversification. This means investing in a range of different stocks. This can be as simple as choosing multiple stocks rather than one, but can also mean choosing stocks of different industries, stocks from different sized companies, and stocks from companies with different growth patterns. Diversification can help mitigate the risk of a particular company's stock performing badly, or an entire industry suffering problems. The downside of diversification is that it limits the benefit of an individual stock performing amazingly well, but this is a price beginners can usually afford to pay.

A good option for many beginners is to consider tracker investments. These are funds that allow an investor to buy a range of stocks that are designed to reflect the performance of the market as a whole. Some such funds literally include every stock, while others are selected as a representative sample. As well as offering the benefits of diversification trackers can, in theory at least, benefit from the general trend of markets showing steady gains. This is no guarantee of success though. While most markets generally gain in the long run, they can suffer major falls, just as with an individual stock.

Stock market beginners need to clearly understand the costs involved in trading. The main cost is the commission fee paid to a broker when a person buys or sells a stock. There will also be taxes to pay on profits; the exact level varies per country, and in many cases, depends on how long the investor holds on to the shares. Once beginners understand these costs, they can better judge how much of a gain they will need to make on a stock to come out ahead after costs.

One option many stock market beginners forget is value investing. This is where the primary aim is to make money from the dividends paid to stockholders rather than to profit by selling the shares. Depending on the dividend, it can be possible to make a bigger return from dividends than from other forms of saving or investing. The keys to look for in selecting such stocks are what dividends the company has paid in the past, and whether the fundamentals of the company's financial performance mean it is viable that it will continue offering such dividends.

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