Time to Make Cents

You’ve researched the stock market ad nauseum and you are looking to start investing. Unfortunately, while you have obtained knowledge, you do not have any experience investing in the stock market and with your limited investment capital, you cannot afford to make a big mistake. This entry will go over some suggestions on how to get you stock market toes wet, before you jump right in.

The Internet has made investing easier and more accessible than ever. With a plethora of online discount brokerages and financial information websites, everything you could ever want to do in terms of investing can be done over the computer. Ingeniously, the creators of many of these sites recognized a need for users to create their own “fantasy” portfolios. Users are given a virtual bank account filled with a large amount of money (often $100,000). Users have the ability to purchase stocks on a variety of stock exchanges at their current market value. Technology enables users to track their progress in the market, with the computer calculating current market price, return on investment and often a variety of graphs to visualize your performance to date. An excellent simulator can be found at http://simulator.investopedia.com/.

Simulators offer users a risk free way to engage in the stock market. Novice investors can gain the self-confidence to invest their own capital after a while and experienced investors can practice advanced strategies such as technical analysis or futures and options trading. I believe investors should spend as much time as they require until they feel confident in their abilities to invest in the stock market. If you are unreasonably unsure of your investments, you will be in a constant panic. In the worst-case scenario, you may make a major mistake investing in a losing stock, losing not only your money but also your confidence in your ability to invest. Some people may find that regardless of the time they spend, they do not feel comfortable investing in the stock market. Passive equity investments (that is, equity investments that do not require active management) such as index funds can be utilized to experience the positive growth of the market, without exerting any additional risk (on top of general, unavoidable market risk). It goes without saying that simulators are only effective if the user treats their fantasy portfolio as if it were their own money. If one does not treat the portfolio with the same respect that they would treat their own portfolio with, than the investor will gain no value from participating in the simulator. When used correctly, utilizing a simulator will improve investors’ knowledge of their ability in the stock market, allowing them to evaluate how they plan to invest their own capital.

One way to improve your investing self-confidence, while reducing your own personal risk in a social setting is to participate in an investment club. Investment clubs come in all shapes and sizes, but the common element that all clubs share is the shared investment portfolio. Members are given the opportunity to purchase units or shares in the club’s portfolio. The money earned from the sale of the units or shares is then pooled collectively. Members democratically decide on how the money should be invested (with each share/unit worth one vote). Investment clubs are excellent because of the opportunity for learning that they provide. There are established investment clubs everywhere, just ask around! The benefit of joining an established investment club is that new members will be able to learn effective strategies and skills from established members. If you are unable to find an investment club that meets your likings, create your own. Convince your friends to join you. The experience can be a lot of fun! Create some ground rules. When will you meet? How often will new investments be purchased? How will the group decide to sell investments? Give your members different roles within the club. Everyone should have the opportunity at some point to recommend an investment. The advantage of suggesting a stock to a group is that you really must do your homework! Group members will want to ensure they are making a worthwhile investment. This will improve your own analytical skills and lead you on the road to choosing better stocks. By working with a group you will also be exposed to more information. Perhaps other members are aware of some negative information that you did not read about. Such situations will only help you in the long run, as knowledge truly is power. Most importantly, you will be able to learn from other people’s mistakes. When your money (and your financial goals) are on the line, this is significant! Most importantly, no matter how the club’s portfolio does in the end, you will have only invested a small amount. Even if you lose it all, consider it the cost of learning a lot of valuable information that will help you make better investing decisions in the future!

Hopefully, you have obtained some ideas of how to gain some experience in the stock market. No matter what, do not invest in stocks until you are confident in your ability and have researched your positions fully. There is nothing worse then investing in a stock because “everyone else is doing it”. There will always be risk in equity investments, but poor planning and decision making only makes these investments riskier. Take your time and use your head.