If you’ve never been an active investor before, it can be an intimidating transition into active investing. While a tough thing to master, I believe it is crucial to begin active investing so that you can learn how the stock markets work and learn how to invest. Only through active investing can you hope to improve your rate of return over time, which should be a goal of anyone pursuing financial freedom.
Why You Need To Actively Invest
I firmly believe that it is impossible to learn how to invest and learn how the stock market works without having rael money in play. This doesn’t mean lots of money, but it does mean some money. I often compare it to playing poker with fake money or without money on the line. The action isn’t realistic, and does not mimic real life. In order to learn how to enter and exit positions wisely, you have to use real money.
Furthermore, without having real money in play, you will never follow the market as closely. Learning how to invest requires you to learn the basics of the broad stock market. Some basics can be learned in online schools through economics courses. How do the trends develop? What catalysts drive the market higher or lower? You need to follow the market and begin to pick things up.
Learn How To Analyze Companies By Focusing On One or Two
When it comes to long-term investing, analyzing company fundamentals are key. When you buy a company’s stock, you are becoming an owner. You need to learn how to do your research to determine if you want to become an owner of a company. The best way to do this is not to follow many companies, but to follow one or two with an intense focus.
You may start by picking a company that you’re already familiar with such as Apple Inc. (AAPL). Then, maybe pick a well known company that you’re not so familiar with. The combination of the two should give you a good joint experience.
You want to look at things such as the company’s balance sheet, earnings growth, revenue growth, management team, product mix (are they a leader in a specific field?), competition, international revenues, etc.
Also, when determining one or two companies to dive deep into, I would recommend picking strong, leaders in their respective fields. For example, don’t pick a company who’s glory days are behind them. Pick a company that is doing well right now. You will be able to more easily find quality material to research for your company.
Get Comfortable With Dividends
Dividends should be your best friend. When you receive a dividend pay out from one of your stocks, that is your money and cannot be lost. Dividends are a great way for new investors to cautiously gain experience in the markets. Dividend yields will help you cushion against any potential losses.
The reality is that in order to make money on a non-dividend paying stock, you have to trade it – meaning you have to buy it and sell it at a higher price. This requires much more knowledge and activity than simply buying and holding a cash flowing dividend stocks. For new investors, I strongly encourage dividend stocks. Note: Apple (AAPL), mentioned above, does not currently pay a dividend.
Be Patient
I believe that it takes 2-3 years of active investing to gain a basic understand of how the stock market works. After that, you will continue to learn and hone your investing strategy for the rest of your investing life. It is crucial to begin your active investing as early as possible since there is a definite learning curve.
You need to learn how to be patient with your investments. Your stocks may stay in a small trading range for years (another reason to own dividend stocks). New investors tend to be overly-active, trading in and out of positions far too frequently. Be patient, put some stop losses in place to minimize the potential loss you may incur, and otherwise sit tight. This is a marathon, a long journey. I wish you good luck!
Disclaimer: Investing and trading stocks can easily result in the loss of money. There is a high risk in the stock market. Be sure to do thorough research before making any investment decision and/or talk to an investment professional. This site does not encourage buying of any securities, stocks, bonds or any other type of investments. Exercise extreme caution.
