If one of your New Year's resolutions is to take control of your finances and
put some of your savings to work, you might be considering using the stock
market to do that. 2011 proved to be a tough year for even the best
institutional investor and individual traders had an equally tough time
navigating markets that saw a large amount of violent swings, both to the upside
and the downside.
If you're planning to enter the markets as a new trader this year, here are a
few tips to consider as you put your money to work.
Don't Trade
for Real … Yet
Before you put your hard-earned money to work, spend
some time trading fake money. Many brokerages and sites like Yahoo! Finance
offer virtual or paper trading accounts that allow you to get a hands-on feel
for how the markets work. Just like any new skill, you probably won't do very
well with your first attempts. Use virtual funds to see if your investing
decisions could potentially earn you money. Once you see that you're having
success, put a small amount of real money to work. Continue to use your virtual
account to test new strategies. Even the pros use virtual accounts to test the
waters.
Learn How to Research
It's easy to make the
mistake of relying on somebody else's research for investing decisions. There
are two problems with this. First, somebody else's risk tolerance, investment
objective and account size aren't the same as yours. The trade may be right for
them, but not for you. Second, they may tell you when to get into the trade but
they likely won't tell you when to get out.
There are plenty of good resources that teach you how to research before you
buy. Read books, talk to other traders and read company balance sheets, listen
to conference calls and work to gain a real understanding of the markets. You
can learn to excel at any endeavor through experience and study. Becoming a
great money manager requires the same commitment.
Say No to the Seminars
Every big city has an endless
supply of weekend-long thousand dollar or more seminars that guarantee to make
you the next great trader. Don't be fooled. They may have some good information,
but if becoming a high-performing, profitable trader could happen over a
weekend, everybody would do it. There are better ways to spend your money.
Don't Try to Win
We've learned that in order to get ahead
in this world, we have to be better than our competition. That isn't true in
investing. If you're new to the markets, you aren't going to beat the
professionals. Even the professionals don't always beat other professionals.
There are an exceedingly small amount of professional investors who have a
consistent track record of beating others in the market. Aim to invest your
money in products that tend to perform in line or slightly better than the
market. Later, as you gain more investing experience, you can try your hand at
some of the riskier trades.
Don't Make Money, Manage
Risk
The professionals know that if you manage risk correctly,
making money will naturally follow. Having a portfolio that includes a good
supply of companies with a track record of success and that pay a healthy
dividend, is good risk management. Only investing in products you truly
understand, without looking to get rich quick, is the mark of a mature investor.
You aren't going to strike it rich by capturing short-term gains, so don't take
the unnecessary risk of trying.
The Bottom Line
2012 promises to be another year of
tough-to-navigate markets for even the best traders. Don't try to score the big
win. Instead, use 2012 to be conservative with your money as you learn the
complicated art of trading stocks.
