Congratulations! You’ve finally decided to take the plunge into the stock market.
Sure, maybe you already have some exposure to the market from your 401K, a mutual fund, or those three shares of Disney your great-aunt gave you for your 13th birthday, but now you’re doing it for real.
Your brokerage account is open, funded, and you’re ready to buy (and sell) individual stocks. What a moment. But, before you hit the “submit” button for the first time, allow me to give you some tips.
Start by Buying What You Know
No matter if you’ve already done a ton of analysis to determine what to buy, or are just going throw some money at a stock you heard mentioned on TV, forget it.
Instead, start off by buying something you know. Something you are familiar with. Something you like.
This is really, really bad advice for someone who is trying to make money in the market, but that is not your job right now. Your job right now is to learn about the market. To get familiar with it. To understand how it works.
You’ll have plenty of time — in some cases, decades — to make money in the market, but first you have to get a feel for what it’s all about.
If you like GoPro and Twitter, go ahead and buy their stocks, even though they are dogs right now. Buying something you relate to will engage you in the market, which will help you understand it better.
Trust me, you won’t get hurt, thanks to this next tip.
Just Dip Your Toe in for Now
You’ve worked hard for the money you are about to put in the market. Maybe it’s a few hundred, or a few thousand, but each dollar represents a piece of personal time and effort that you sacrificed.
That is why you are going to start off by investing only fifty dollars.
“What,” you’re screaming. “How am I going to become the next Warren Buffett by investing only fifty dollars?”
You’re not. But again, that is not your job right now. Your job is to learn about the market, and a big part of that process is learning about yourself.
Until you own your first stock, you have no idea how you will react to wins, and react to losses.
Mike Tyson once famously said, “everybody has a plan until they get hit in the mouth.” Losses are how the market hits you in the mouth.
Keep the bulk of your powder dry until you’ve done a dozen or so small trades and have had a chance to see how you handle the ups and downs of the market.
You’re Going to Lose a Lot So Get Used to It
Nobody likes to lose. But that is a central component of investing in the stock market — you are going to lose as much, or more, than you win.
This is true for both the casual investor and the billion-dollar hedge fund manager, as illustrated by a quote from Peter Lynch, one of the most famous money managers of all-time.
In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.
And he is talking about the cream of the crop. You will be lucky to win 50% of the time. But that is okay thanks to this next tip.
Take Your Losses Quick
Nobody likes math, but math doesn’t lie. So I am going to use some math here to prove how you can make money in the market by losing a lot — as long as you take your losses quick.
Let’s say you have $1K and divide it equally into ten different stocks. Each position is worth $100 (and we’re not including commissions because you are trading commission-free with someone like Robinhood).
You lose 5% (or $5) on six of your positions, for a loss of $30. On one position you break even, another you make 10% (or $10), and on the other two you make 15% each (or $30).
You have now lost on 60% of your positions and won on only 30% of them, but you are still up 10% on your $100.
There is no more important rule in the stock market than to take your losses quick. Learn to do that and you will make money for as long as you invest.
And finally, here is why you will be able to do this.
It’s Not Personal
The stock market has been here for hundreds of years before you, and it will be here hundreds of years after you are gone. And no matter what you do, it will never know you existed.
Too often investors battle the stock market as if it is a living, breathing entity, trying to take their money. Their ego gets involved and they hold on to losing stocks, refusing to sell them, as if doing so would be admitting some type of defeat.
The best traders and investors don’t take their loses (or wins) personally. They keep emotions out of the equation. And it is this arms-length approach to investing that allows them to keep a level head and stay objective about stocks.
They know that the only “good” stocks are the ones that are making them money, and don’t hesitate to sell their losers.
Brian Lund is a veteran trader with 30 years of market experience and VP of Business Partnerships at SparkFin.
The SparkFin app is a free and easy way to get new stock ideas every day. So do us a favor — download SparkFin from the iTunes store — and then go crush the market.
