The Fundamentals of Successful Investing

Investing in the stock market is a scary thing for new investors. It is even scarier for anyone who is doing it alone. I know, I started out with an online brokerage account with under a thousand dollars in the account. When you first start out, it is very important to not invest any significant amounts of money. Think of it as play money, or rather, money you could afford to lose. It should not be money you need to sustain your standard of living. There are some basic fundamentals that I’ve learned the hard way through my mistakes in the stock market. This article will teach you the fundamentals of successful investing so that you don’t make the same mistakes that I did!

Looking for advice? Consult yourself!
By no means do I suggest isolating yourself from the market analysts, infact I recommend you read and research everything the analysts say about the market and/or your stock(s). However, you should never invest only by what others are saying. This applies to every situation, from something you heard on an online message board, to any TV analysts opinions’ (I love Jim Cramer’s show and the Fast Money show though). If you are new to the market and feel that you can’t make decisions for yourself yet, then stay on the sidelines until you’ve gotten comfortable and confident enough to invest by your own decision making. Always remember that you never know what someone else’s agenda is when they offer you advice.

Get a feel for the market by keeping up with it
I need to state right away that investing by your gut feeling is the most foolish thing you could do, even more foolish than investing solely by what other people tell you. I highly recommend purchasing a subscription to the Wall Street Journal (I use the online edition), or any financial newsletter that will allow you to keep up with the current economic events. The reason it is important to stay up to date with market happenings is because there are always key events (ex: Federal Reserve meeting, Company earnings for a quarter, etc) that can significantly affect the market. If you’re new to the market, keeping up with the market by reading financial newsletters is also a great way to ease your way into stock market investing.

Have a plan
After doing your homework, and definitely before you buy/short the stock you’re interested in, you need to have a plan. Are you planning to hold for the long term? Looking for a short term momentum play? Know something the market doesn’t know (just kidding, that’s illegal)? You need to have a plan where you state clearly to yourself, this is where I want to get in, and this is where I want to get out. It is important to do this so that you can keep a clear state of mind, and stick to your goals. Otherwise, you can fall victim to your emotions. Which brings me to my next point…

Throw your emotions out the window
When it comes to investing, it is hard to not become emotional when you’re losing or gaining money. But to be successful in investing, you need to mentally train yourself to leave your emotions out of your thought process when you invest. It is imperative to realize that sometimes you will simply lose money, sometimes large amounts. As well, you sometimes will gain large amounts of money. Neither should matter in your thought process of what you plan on doing with your stock. If you ever become emotional while investing with stocks, you’re setting yourself up for failure. Which now brings me up to my next point..

Don’t be afraid of failure
If all you do is fear that your next move will put your portfolio in the red, you’ll miss out on the potential winning moves. Most investors are wrong more than half of the time they invest, so don’t feel discouraged if you’re taking on losses. If you let fear rule your thoughts, you’re once again falling victim for to your emotions. Condition yourself to realize that learning how to invest successfully is truly a right of passage. Always remember that if you invest rationally, with your emotions set aside, do your homework, and keep up with the market, you should ultimately be successful.

Trust Yourself If You Know You’re Right
To give you a personal example: I was on the sidelines with 100% of my money in cash thinking that the market was headed for a correction. It took over a month, and 500 points upwards in the Dow Jones Industrial Average, before I saw that same index drop over 1000 points downward. It is very trying on your goals and your opinion of the stock market when everything is happening to the complete opposite of your beliefs. In cases like this when you find yourself doubting yourself, it is important to sit down, and rationally consider the situation. Ask yourself questions such as: Has anything changed? Could it be that I was wrong? Is the market just being irrational? Re-evaluate your plan if necessary. In my case, I doubted myself every day, but I reassured myself that the upward rally in the market wasn’t justified, my initial beliefs of the problems in the market were still there, and in the end I came out correct. If you know you’re right, stick to your guns, but don’t be afraid to re-consider your position/beliefs.

Never invest in penny stocks
It has been said that trying to find a legitimate penny stock company is like trying to find a prostitute without any STDs. Just about every single penny stock is scam. Penny stocks operate on a different trading board, in which the SEC does not regulate, and that does not require for the companies to submit their annual earnings and other important documents. Most of these stocks are pump and dump stocks, offering no real value. Many first time investors are tempted to trade penny stocks (and I do emphasize the word “trade”, because you cannot invest in a penny stock) because of their perceived low cost and higher volatility that presents a potential for big gains. If you’d like more information on penny stocks, read my article “The Risks of Penny Stocks“.

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