4 Things to Keep in Mind Before Investing in Stocks

This article has been sponsored by Etoro.

The stock market can be very intimidating to a novice looking for handsome returns. Of course, research is paramount before you dive in, and looking to successful traders for advice is a good place to kick off.

There are a plethora of great resources out there for beginners, along with platforms like eToro which make investing smaller amounts of money possible. It also allows you to follow and copy the trades of popular investors, eToro market analyst Josh Gilbert told Lifehacker Australia.

“Investing and trading within the stock market is now very modern, with someone you know most likely owning a stock or trading on a commodity,” he said. 

If you’re keen on delving into the stock market yourself, there are 4 things Gilbert says you should keep in mind.

1. Understand the risk

Investing is not risk-free, and while steps can be taken to minimise that risk, understanding its presence in the stock market is incredibly important. “You have to know how much money you are willing to risk when investing,” Gilbert said.

While more risk is often associated with higher returns, it also works the other way and can wipe your entire investment out faster than it was deposited. As many investors will tell you, the stock market is better seen as a long play.

“The biggest mistake can be that people are hoping to become rich overnight,” Gilbert said. “You need to have a clear goal in mind when first investing that money. When do you need it back? Can you leave it there for 2 years? Will you be scared at the first dip in the market?” 

“Most of our successful Popular Investors at eToro have long term stock portfolios, where they purchase stocks with growth potential. They are happy to put aside funds for a number of years and allow this to grow over time. So patience is a big factor in investing.” 

Having a diversified portfolio that covers a number of different assets and time frames is one great way to minimise your investment risk, he notes.

2. Don’t let fear influence your decisions

If you’ve got money on the line, market dips can be scary and could even lead you to consider moving or withdrawing your investments altogether. Gilbert, like many traders, doesn’t let fear dictate his decisions.

“Another factor many successful traders have is not letting fear set in at the first sign of trouble,” he said.

“A great example of this would have been the crash from the coronavirus, where we saw the markets at their lowest levels for over 30 years. Since then, the Nasdaq 100 has gone on to breach pre-coronavirus levels and set new highs and the S&P is close to reaching the levels it saw before the pandemic.”

“The important thing to remember in a ‘market dip’ or ‘crash’ is to not panic. Markets are very much cyclical and this has been shown with the recent recovery.”

Learning not to worry is something that’s often easier said than done, but researching common trends and cycles is an important step in understanding how the market works and can help alleviate those stresses.

3. Finding a needle in the haystack is incredibly rare

Trying to find and invest in the next Apple might sound like a great approach to making fast money on the market, but it’s not realistic. Not only are stocks like this rare, but the risk associated with putting all of your eggs into one basket is also very high.

“A mistake many investors will make is trying to find the stock that is sitting at 50 cents and they are hoping it will reach the moon in no time,” Gilbert said.

“If we take just 3 big names such as Amazon, Apple and Microsoft – All 3 of these companies are up more than 50% YTD, with Apple up more than 80%. You don’t have to pick an obscure stock to see returns. That doesn’t mean you should invest all your money into Apple, but it also means don’t be put off by what’s in front of you.”

In other words, you don’t need to be looking for a needle in the haystack when there are great opportunities in the everyday world. 

“A great example of this is Zoom, the technology company has excelled as everyone has flocked to working from home, the recent demand for their product has sent their share price through the roof.”

4. Don’t be afraid of the research

If you plan on crafting your own portfolio of stocks, knowing exactly where you’re putting your money is vital. This means doing plenty of research, which shouldn’t be a scary prospect once you know where to look.

“When investing your money it is key to know what a stock really looks like and what its balance sheet has to say,” Gilbert said. “eToro provides an excellent research tab for investors to really key information about a company, such as analyst price targets, hedge fund activity and insider transactions.”

“Analyst price targets are key as these are the experts within the industry so should give new investors price targets to look for when buying and selling. Comparing stocks in the same industry is a place to start and covering areas like growth, management and financial strength is a great place to start.”

Gaining an understanding of these concepts and more is key for those looking to break into the market on their own, so a healthy appetite for learning the ins and outs will be a massive help.