Before you jump into the world of the stock market, there are a few rules you’ll have to learn. Too many people approach investment as a game, choosing where they place their money based on hot tips or rumors that they hear from friends or coworkers. There’s a reason that people speak regularly about “playing” the stock market.hey get from others (Edwards,:
Another barrier to smart investing for many people is learning the terminology. For those just getting started, it can feel like investors are speaking an entirely different language, dropping complex words that they don’t understand. But complex words don’t necessarily mean complex concepts, especially when it comes to finances. This chapter will include a stock market glossary for easy reference. As you start investing your own money, any time you encounter a word you don’t know, you can simply refer to the glossary for clarity. The more comfortable you are with investing and the stock market, the more comfortable you’ll become using its unique language (Edwards, 2016).
If you want to play the stock market with efficiency and success, there are 8 simple rules of basic money management to follow.
1. Borrow wisely, if at all.
The line between “good” debt and “bad” debt is thin, but most of us don’t realize that until it’s too late. In an increasingly debt and credit-based economy, it’s almost impossible not to borrow at some point. But the longer you can hold out, the better off you will be financially.on your investments (Edwards,:
“Good” debt are the often-necessary loans that give you access to social mobility. These are things like student and business loans, things that will ultimately put you in a better place in which to make more of your own money. Though you may have to go into debt to put yourself in a place in which to start making real money, the more financially secure you become, the better able you will be to manage and eventually pay-off your debts with your own money. The more of your debts you can manage on your own, the more money you stand to gain from smart investments (Edwards, 2016).
“Bad” debt, on the other hand, is debt that has no long-term positive impact on your financial or life situations. Credit cards firmly fall into this category, as do “payday” loans. If you don’t need it, don’t borrow in order to get it. You don’t want all of your carefully gathered savings to go to maxed out credit cards or payments on auto loans for a car that you no longer drive. To keep things in perspective, always weigh potential debt against your current investments. If the interest you stand to pay per year on a potential loan outweighs the interest you’re making per year in investment returns, then it’s probably not worth it.
2. Save from the top.
Think of investments as a savings, not as extra money. The more money you invest, the more money you stand to make. So don’t wait to invest when you have the extra money to spare. Budget regular investment payments out of your weekly or monthly paychecks. In the words of Warren Buffett, don’t save what you have left after spending; spend what you have left after saving.
Of course, it’s counterproductive to prioritize savings over regular bills and debt, and for many of us, there’s very little left over once those two things are taken care of every month. When you don’t have much money to work with, it’s too easy to convince yourself that you “don’t have enough” to save, or that you’ll start saving when you start making more money. This mentality is incredibly financially toxic, as it prevents you from investing as early as you possibly can.
Don’t think about savings in terms of dollar amounts. Instead, take a look at your monthly or weekly paycheck. Commit to investing just 1% of that check, no matter how much it is. If 1% of your check is $200, great. If 1% is just $2.00, then make that your regular investment amount. The dollar amount, as we’ve seen, is far less important than how long those dollars accrue interest. Beginning with 1% will get you started, and get you in the habit of regularly saving. That way, your mentality will no longer be “when I have money, I’ll save” and become “when I have money, I’ll save more.”
3. Develop good financial habits.to invest instead (Friedberg,:
4. End the paycheck-to-paycheck lifestyle.ut it is possible (Friedberg,:
The secret to avoiding this situation is budgeting. Make sure that the money you’re spending never exceeds the money that you’re earning. If that means you have to cut out or reduce a few unnecessary expenses, then so be it. You’ll quickly find that driving a cheaper car or inviting your friends over for dinner rather than going out to the bar every weekend isn’t as much of a sacrifice as you think, especially when you see how much more secure you are financially as a result. Even without investing the extra money, you’re getting ahead simply by committing to spending less.
5. Keep your investing simple.
There’s no need to go to an advisor or build a complex investing portfolio that spreads your money across multiple different accounts, nor is there a need to continually watch the stock market, ready to shift your money to the next “hot” stock at a moment’s notice. Choose one or two low-cost S&P 500 index funds, where you can make a regular weekly or monthly contribution that’s in-keeping with your budget. To open your first investment account, follow these five-steps to get yourself started without any hassle at all:compound interest (Friedberg,:
2. Create an account online with your chosen company (Friedberg, 2020).
3. Choose an index fund that invests in the top 500 companies and has low fees. These will be the most reliable places to send your money, places that are almost guaranteed to weather the inevitable ups and downs of the marketplace. And of course, the lower the fees, the more money ends up in your pocket.
4. Transfer money into your investment account.
5. Make periodic investments, following a regular investment schedule for optimum results.
6. Invest for the long-haul.
Any and every time you choose to invest, commit to that company for the next 10 years. Smart investing doesn’t happen overnight. If you’re constantly buying and selling stocks, you’ll never give your account enough time to accrue the interest that you need to really start earning a profit.
In this way, following the stock market can actually be detrimental to your investing habits. It’s too easy to feel like you’re losing money when the market goes down, and therefore too easy to make decisions based on fear and rumor than on established trends. The best way to invest is to choose two or three companies that you feel are reliable, and then automatically transfer your investments into that account every month. Regular investments will insulate your account against loss when the market is down, and ensure that you continue to earn a profit when the market is up.
7. Don’t blindly follow investing advice.
Whether or not a market “tip” results in money has more to do with luck than with any kind of insight that your advisor may have had. There are people who devote their entire lives to studying the movement of the stock market, and while the insights you get from those people may be sound, the reality is that the marketplace is essentially unpredictable. If you lose money based off of a “hot” tip you got from a friend or read in a magazine, it doesn’t just set you back in dollars - it sets your account back in time, as well.le changes course (Friedberg,:
8. Save for the unexpected.standard savings (Friedberg,:
The reason for this is that the marketplace isn’t the only financial arena that’s filled with unpredictability. Life is unpredictable, too. Emergencies happen. If you find yourself scrambling for cash every time something unexpected happens, then you’ll be tempted to use credit or take out loans to cover your costs without blowing your budget. And the more debt you incur, the less money your investments are actually making you. The last thing you want is for years and years of compound interest to end up going toward credit cards and neutralizing outstanding loans.