Friday, October 7, 2011

How To Start Investing In The Stock Market

Many people are anxious to get started investing in the stock market. Often times with good reason. Over the long haul, the US stock market has earned returns that are quite impressive. You will often hear people tell you that the market on average returns 11% per year. If you compound that interest over 30 years even small sums can become quite substantial. But you should keep a few pieces of advice in mind:

Don't Try To "Beat The Street"
Many people get caught up in the exciting notions of "hot tips" or getting fantastic returns by investing in individual stocks. While those can be ways to make great returns, they can also be great ways to earn lousy ones. Wall street is filled with traders who are paid full-time to make money and even they can rarely exceed that 11% return that is the average. It can be very dangerous to decide that you hold the magic bullet to do what they cannot.
Index Funds
Steps to getting started:
Proceed with Caution
The safest and easiest way to invest in the stock market is through index funds. These are funds that choose popular averages like the Dow Jones Industrials, NASDAQ Composite, or S&P 500 and buy proportional shares to match the returns. Thus if you invest in an S&P 500 index fund (the most popular index funds), you should basically get returns that mirror what that index does for the year. Thus you can invest in the stock market without having to do tons of research, and still beat most of the money-managers out there.
Dollar Cost Averaging
In coordination with buying index funds, dollar cost averaging can make your investments even safer. Say you have $1200 to invest every year. If you put all of that in an index fund at the same time, you might pick just the wrong time and start out with an immediate loss. Getting off to this "bad start" can seriously hurt your long term growth. If instead you take that money and divide it up into 12, $100 contributions and invest every month, you are making it less likely that you will pick the wrong time to get in. Also since you are contributing a fixed dollar amount, when the market is up you will buy less and when the market is down you will buy more. This should help you reduce your risk even more.
Learn, Learn, Learn
Like almost anything else in life, you're going to get out of investing what you put into it. If you haphazardly throw money into stocks and funds that sound interesting at the time, you're likely to see poor returns. You may do well in the short-term, but most of us are concerned about the long-term. Everything you learn now will keep helping you make better decisions for the rest of your life. Don't be in a rush to get started. A few weeks getting yourself an education can make a lot more difference than the extra returns you would have earned in those weeks.
Consider reading some books as well as doing research on the Internet. You will never regret learning as much as you can before you start investing.

Source: website