It seems unfortunate that the best way to learn important lessons in life is through experience. Experience usually involves something bad happening because those memories tend to last forever.
With finances this method of learning is largely the same. It is the sad fact that millions of people lose various amounts of money on the stock market every single year. Many of these people are beginners and new traders that have not yet learned a few simple lessons that can be the difference between a profit and a loss. Here are a few of those lessons.
Have a Plan, Stick to the Plan
Many beginners start out investing by simply waiting until they find a company they like, then purchasing shares of that company. Some will go a little further and wait until the price of that company has a few bad days or even weeks, and then buy in.
This is not a trading strategy. If this is your plan, it is guaranteed to fail. Just ask the millions of people that do it every year. Instead, build out one simple strategy that you think will work. Write it down, and then stick to it. No matter how tempting it is to break out of your strategy, don’t do it. Give it the time you planned on giving it when you were thinking logically. If that time comes to an end and the strategy is still not profitable then you can move on.
Most new traders do not have a lot of money to invest. That means that broker fees eat up a much larger percentage of their profits. If you are making a few trades a week, it can quickly add up to hundreds of dollars in fees. Some brokers offer services that can make these fees worth it, others simply have higher fees.
Logic Trumps Emotion
There are few feelings as scary as watching money disappear into thin air. That is exactly what can happen when investing in stocks, however. Imagine watching your account balance dropping by hundreds of dollars right before your eyes. It almost feels like a movie – but it is real. Many traders make the mistake of letting the emotions control them. They buy stocks at high points because they don’t want to miss out on potential profits. Then when the same stock starts to drop they sell out of fear of losing money. These traders lose over and over again because they are ruled by both fear and greed, not logic.
Don’t Invest Money You Don’t Have
This applies in multiple ways. It should be obvious to not invest money that you can’t live without. No matter how guaranteed an investment may seem, there is no such thing as a guaranteed investment (at least not one with any sort of significant returns).
Another part of this is not investing money you may need to pull out in the next year or two. Yes, I said year. If you hold stocks for long enough and have a diversified enough portfolio, you will probably almost be okay in the long run. But the market has taken huge dips, as shown in the most recent election results. Don’t be forced to sell out at the very bottom of a huge correction because you couldn’t resist investing money you shouldn’t have.
There will be other lessons learned. They will often be painful. If you are careful and only invest money that you can lose then these lessons will be valuable and eventually you will likely succeed.