You may have heard of the Dow or even know what a stock is. However, do you know what it means to invest in the stock market?
While this may surprise you, you may already be invested in the market if you have a 401k or have company stock options or some other ownership stake. What should you know about the market before you start investing to help you make better decisions?
Don’t Worry About Daily Movements
There is a chance that your stock could fall 10 percent in a single day. It is possible that your stock will go up by 10 percent in a single day.
This is not normal, and even if it is does happen, it doesn’t mean that the trend will continue for the long haul. When you invest in a stock, you are saying that you like its long-term potential.
On average, the stock market goes up by 7 percent a year with dividend stocks offering an average of 11 percent returns per year.
You Don’t Have to Invest in Single Stocks
It is never a good idea to put your entire portfolio into a single stock. While it is possible that particular stocks could outperform the market in a given year, this will not continue over the course of a decade or 30 years.
Instead, you want to invest in entire sectors or multiple sectors within the market. This can be done through the purchase of mutual funds that offer exposure to many companies at the same time.
An ETF is a mutual fund that you can trade just like a stock, and it may be worthwhile who want more flexibility in their trading.
Dips Can Be a Good Thing
When a stock goes down in value over the course of a day, week or even a year, it could be good for the long-term health of your portfolio. During a temporary retreat in price, you can buy stocks for less and then watch them appreciate in value again after the lull is over.
If you subscribe to price cost averaging, you can take advantage of dips in the market to make more money on smaller overall movements.
For instance, if you bought a share of stock for $100 and it moved to $101, you would make a dollar. However, if you bough one share of stock at $100 and another at $98, your cost average is $99. Should the stock move back to $100, you make a profit even though the stock is at the same price as it was when you first bought it.
You Don’t Necessarily Need Expert Advice
With the advent of index funds and a wealth of information available online, you don’t necessarily need to pay for someone to create a portfolio for you. Instead, you can use an online forum to get advice or use an index fund to simply track the entire S$P 500 or Dow instead of trying to pick a specific stock or fund.
As you learn to read stock charts and understand what moves a stock’s price, you can start to implement your own strategies that best meet your needs without paying large commissions.
Investing in the stock market can be your best option when it comes to growing wealth at a rate higher than inflation. You don’t have to sell until you are ready, and your portfolio can be passed on to future generations if desired. Therefore, you can secure your own financial future while also potentially helping your children or grandchildren at the same time.
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Photo: Jake Rust from GotCredit / CC 2.0