Stock Market Strategies for Beginners
Experience is a great asset when it comes to investing in stocks. But how do you gain that experience? How does a rookie investor learn how to play the stock market?
Keep in mind, at some point even Warren Buffett was a newbie making his first stock pick. No one is born with experience.
The key to gaining useful experience is being willing to learn. This article can take you through some of the steps that help you learn how to make smart investments.
Getting Started: What Kind of Investment Strategy Do You Want?
IN THIS ARTICLE
Plenty of people invest in stocks without ever making an individual stock pick themselves. There are ways to have the choices made for you: mutual funds, robo-advisors and financial advisors.
So perhaps the most basic decision you have to make is whether you want to leave the investing to professionals or pursue a do-it-yourself strategy.
There are different reasons people choose a DIY approach:
- They think they know how to get an edge. Whether it’s because of insights into specific companies or a system they believe can pick winners, they may feel their chances of success are better if they make investment decisions for themselves.
- They find the process interesting. Studying market data, reading company reports and watching market trends isn’t everybody’s idea of fun, but some people can’t get enough of it.
- Saving on fees. Whether it is through a mutual fund, robo-advisor or investment manager, people might feel having their investments handled professionally does not justify the extra fees involved.
You don’t have to pick one approach or the other. Even if some of your money is professionally managed, you can also make some investments yourself on the side. This can be a good way to learn how to invest without putting too much money at risk.
How to Choose Your Brokerage Account
If you decide to make your own investments in the stock market, you’ll need a brokerage account. There are dozens of choices, so it’s important to choose one that’s a good match for the investment strategies you have in mind.
Here are some of the things to look for when choosing a brokerage account:
- Commissions
These are fees charged for every trade you place. Generally speaking, online brokers have cheaper commission schedules than brokers based in traditional brick-and-mortar offices. Some online brokers even offer accounts with $0 commission rates.
- Other fees
Commissions may not be the only other expense involved in having a brokerage account. Look at the full fee schedule in the context of how you plan to use the account.
- Resources
A traditional broker may offer you personal support from a financial advisor who can make recommendations for your account or help you figure out how to implement your market strategies. On the other hand, an online broker may have more to offer in terms of anytime/anywhere access and automated trading tools.
- Customer support
Even if you don’t want to deal with a broker all the time, it’s good to know whether there’s human customer service available when you need help.
- Product line-up
Any broker should be able to trade domestic stocks for you. However, more complex capabilities such as foreign stock trading, futures, options and margin accounts can vary greatly.
The best broker for you depends on how you intend to use the account. That’s why it’s wise to think through your investment plan before you choose a broker.
Where to Invest Money to Get Good Returns
There are a variety of investment strategies for identifying where to seek a good return. These range from investing according to big-picture themes to picking individual stocks you think will do well.
Here are some examples of different ways to approach investing in the stock market:
Investing by market segment
The stock market can be divided into segments according to the size or origin of companies. For example, there are small, medium and large capitalization stocks. There are domestic and foreign stocks, and foreign stocks can be divided by region or even country.
If you have a very big-picture view of the investment climate, you might want to make investments according to which market segments you think will do best. This is a strategy you can implement most efficiently through index funds. These are funds that can efficiently give you broad representation in a specific market segment.
Investing by industry sector
Rather than picking markets as a whole, you might view investment opportunities according to which industry sectors are poised to do well.
For example, when the pandemic struck, companies that facilitated remote working, shopping or learning did well. Companies that depended on travel did poorly. As you perceive economic trends developing, you can shift your money into industry sectors that are poised to do well and away from those that seem likely to suffer.
You can target investments by industry sector using mutual funds dedicated to specific sectors or by picking individual stocks within sectors. You could also do a combination of both.
Investing by individual stocks
Rather than making big-picture calls on market segments or industry sectors, you may choose to focus on picking individual stocks.
Concentrating your portfolio in a relatively few specific investments generally offers both a greater potential upside and more severe risk than investing broadly in large groups of stocks. It’s also the most intensive approach in terms of detailed, company-by-company research.
Learn to Make Smart Investments
As you’ve probably noticed, the internet is full of click-bait articles on how to play the stock market. The truth is, investing isn’t a game you play. The stakes are too high, and the discipline involved too intense to approach it as a game.
Smart investors are focused on the long term. Hot stock tips and day-trading gimmicks are for losers. The reality is that it can take time for a company’s business strategy to pan out. It can also take a while for market prices to reflect a stock’s long-term value.
Your investment approach should be systematic and repeatable.
The systematic part means making decisions according to a logical process. The repeatable part means being fully aware of that process so you can duplicate successes and address mistakes when you make future decisions.
Examples of Stock Picking Strategies
Here are some examples of strategic approaches to picking stocks:
Technical analysis
Some investors believe they can spot patterns in how stocks behave, and invest according to what those patterns say will happen next. Sophisticated computer tools can aid in trying to discern those patterns.
Technical analysis can be applied to either individual stocks or market segments as a whole. The concern is that past patterns do not always repeat themselves in an orderly, predictable way.
This is especially true when large numbers of technical analysts are trying to anticipate the same patterns. Doing so may affect how the market behaves.
Momentum
You can think of momentum as a simple form of technical analysis. It involves identifying which stocks are experiencing the strongest price movements. On a slightly more fundamental level, it can also be applied to earnings or dividend growth.
Momentum is a risky strategy because fast increases can’t be continued forever. In fact, setbacks can be especially devastating for momentum stocks because expectations are so high.
Even if you don’t pursue momentum as a strategy, it pays to be aware of it. Momentum – both positive and negative – can take a while to turn around. It’s why investors have to be patient about both when to pull the trigger on investment decisions and sticking with their decisions.
Fundamental analysis
Technical analysis and momentum investing are both ways at looking at how stocks behave and trying to profit from a repeat of past behavior. Fundamental analysis means taking a deeper look at the underlying company to try to understand the reasons behind a stock’s performance.
Fundamental analysis can involve examining a company’s business model, including supply and demand for its products and how it’s positioned relative to competitors. It can also mean digging into an annual report to look at what the financials, personnel changes or other developments say about the company’s future.
Two major schools of fundamental analysis are growth investing and value investing.
Growth investing
This is the type of investing with the greatest popular appeal. Investors love the idea of picking the next big, breakthrough winner. There are plenty of people who brag about having bought Apple or Tesla for under $10 a share – though the ones who actually did it probably aren’t wasting their time bragging.
The tricky thing is, growth investing isn’t as simple as identifying companies that are already successful. Stocks in the obvious successes are likely to be trading at such high prices their future returns will be less attractive.
The greatest potential for success in growth investing comes from identifying companies that are poised for unexpected success. This may be because of a newly emerging industry, a fresh approach to an existing industry or an established company exceeding expectations.
Value investing
While growth investors are looking for the next big thing, value investors are shopping for bargains.
Value investors are looking for stocks that are inexpensive relative to their underlying worth. That worth can be defined in terms of assets, earnings or other tangible value.
By definition, value investing is better suited to weak markets because, in high-flying markets, it’s hard to find good bargains.
Also, it’s important to remember that a low-priced stock does not necessarily make a good value. Often a stock’s price is down for a valid reason.
The above are examples of popular investment approaches. There are others, and successful investors often incorporate elements of more than one strategy into their overall approach.
Best Way to Approach Investing: Watch and Learn
Experience is a great asset; but when it comes to investing, experience often comes at the cost of expensive mistakes.
Beginners can gain experience without paying too high a price if they spend some time simply observing the market and trying to figure out what will happen next.
It then helps to ease into investing slowly, using a limited amount of money and taking the time to make good decisions.
Easing into the market slowly may mean keeping some of your money in other, less-risky investments. You shouldn’t view stocks as your only investment option.
Whether you’re just observing or already making real-world investments, be sure to learn from how your decisions turn out.
Frequently Asked Questions
Q: I’m looking for the highest growth possible, as quickly as possible. Aren’t there any good growth opportunities right now?
A: Given the turbulent financial environment of the past decade or so, two phrases come to mind when someone asks about “get rich quick” investments. The first is the old joke that the best way to make a small fortune in the stock market is to start with a large fortune. The second phrase is the name of a web site which champions sound financial practices. It’s called GetRichSlowly.org, and while getting rich slowly may not sound exciting, you can refer back to the old fable of the tortoise and the hare to decide whether trying to do something quickly will give you the highest percentage chance of success.
Nonetheless, with rates on CDs, money market accounts, and savings accounts at near-microscopic levels, the desire to search for more productive opportunities is understandable. Here are some fundamentals to help you with your search:
- Know your risk level. High return potential means high risk – and never trust anyone who says otherwise. Understand how much money you can afford to put at risk, and keep this separate from the money you depend on.
- Pay attention to price. A great story is not enough – an investment also has to be at a reasonable price. Once everyone else has caught up to a great story, the big money has already been made.
- Avoid the bandwagon. Investors who chase the latest craze (see: dot-coms in 2000; housing in 2006; oil in 2008) tend to be run over by the bandwagon as opposed to getting rich on it.
Ultimately, you must prepare yourself for the fact that there are no easy answers – otherwise, everyone would be doing it. However, with some time, effort, and discipline, you can turn yourself into a successful investor.
