Uninformed investors with some money to spare can be a dangerous equation. While there are regulations in place to protect novices from being taken advantage of, there are still some that slip through the cracks. For those looking to dabble in stock investments, here are some tips to understanding the market.
When you own a stock, you own part of the company: As the owner of the stock, you have certainrights and responsibilities. Your right is to be informed of any changes in growth as well as risk of failure. Your responsibility is to familiarize yourself with that information when it comes across your deck. Ignore it, and you can’t plead ignorance later.
Stocks rise and fall: Everyone knows this. However, many amateur investors focus on the “up” and not too much on the “down.” Even if your stock rises, it’s not really beneficial if it’s not outpacing inflation. Different strategies work at different times. Value investing is when you buy low. Momentum investing is when you buy as a stock is on its way up. There’s no guarantee, either way you go.
Stocks grow in many ways: You can put in some money and hope to see your stock grow so you can cash in later. Or, you can take advantage of the dividends you collect just for owning the stock.
You have to pay taxes on what you make: Just like your income, you have to pay taxes on any gains you make when you sell off a stock. Same goes for dividends. Your total return must outpace inflation AND the cost of taxes.
Stocks are volatile: They’re not for the faint of heart. If you don’t have the stomach to let it ride, you probably have no business playing the stock market. Bonds would be a more conservative choice. Stocks work best for the long-term rather than short-term. A stock is volatile when it rises and declines a lot on either side, very rapidly. This happens frequently in the world of stocks. Don’t put all your eggs in one basket if you’re looking to make a quick buck. You’ll drive yourself crazy in the meantime.
There is a concentration risk to think about: While most companies in the stock market won’t fail, the ones that do, fall hard. And that means their investors lose everything. That’s why Forbes says it’s best to own a large number of individual stocks in order to reduce the risk of loss from bankruptcy or a corporate collapse.
Know a good stock fraud lawyer: If you get in over your head or feel you’ve been taken for a ride by a less-than-reputable stock broker, call a trusted stock fraud lawyer, also known as a FINRA lawyer.