Your Guide to the Stock Market
The stock market can be scary, especially when there is so much volatility. There are smart ways you can invest in the stock market so that large daily losses will not affect your portfolio too much.
Know Your Risk
Knowing what your risk tolerance is can help you make informed decisions. If you cannot stand the thought of large market moves then you have a lower risk for tolerance. Your risk tolerance will dictate the stocks you invest in.
Age can also affect your risk tolerance. The longer the time frame you have to invest, the higher your risk tolerance could be. This is mainly because a fairly large stock market loss can usually be made up if you have a long time frame to invest.
Basically, when you invest in the stock of a company, you are becoming a part-owner of that company. It is always best if you understand the business the company is in, at least somewhat. Understanding what you’re investing in helps you make smarter investing choices. Learn about the company or companies you’re interested in and learn about their fundamentals.
You can invest in growth or value companies. Growth companies are usually younger companies that invest in themselves and continue to grow in value.
A value stock is a company that is probably settled in their industry and might not grow much, but they are doing well. They usually have a dividend that is paid out to shareholders. As an investor, you can take the dividend or reinvest it back into the company for more shares.
Value companies are usually less volatile. If you don’t like the extreme market moves, you would probably want to own more value stocks than growth stocks.
Mutual Funds and ETFs
If picking individual companies to invest in doesn’t suit you, there are thousands of mutual funds and exchange-traded funds (ETFs) to choose from.
They comprise a basket of companies. These companies might all be in a specific industry, in a certain economic sector, all growth, all value, or a mixture. Or you can invest in an index fund that tracks a certain index like the S&P 500.
There are passive funds and actively managed funds. When buying funds, you need to look at the cost of investing in the fund. Some funds are no-load while others have front-end and back-end loads. If the cost of investing in a fund is too much, it will cut into any profits you make.
Options give you the right to buy or sell a stock at a given price. Options are not for a newcomer to investing. Trading options can be as simple as buying a call or put or involve complicated strategies. Options can be an excellent tool to hedge losses in the market, but should still be left to those with option trading experience.
The volatility index or VIX will tell you how volatile the market is at any moment. The higher the volatility, the more volatile the stock market will be. A high VIX is what you will see on the days the market is up or down a large percentage.
Looking at a stock’s beta is a good way to judge how volatile that stock is. The beta of the overall S&P 500 market is 1.00. If you want a stock that is not very volatile relative to the market, you would look for companies that have a beta less than 1.
Diversifying your stock holdings is probably the most important advice. Having too much money in one stock, or owning too many companies in the same industry can be risky.
Owning too many stocks in the same industry can cause big losses if that industry suddenly all drops for some reason. Like the housing market or banks. Investing too much of your portfolio in one company carries even more risk if that company were to fail.