How To Start Investing On The Stock Exchange

Without a doubt in my mind, I believe that the main reasons that most people are unsuccessful at investing in the stock exchange are a lack of both preparation and discipline.

Investment in any form is a show of faith in the future, optimism if you prefer. Whether you are buying property, antiques or stocks, you are displaying your positive outlook for your future years.

Yet despite this obviously good intention, many people make dreadful investments and lose large amounts of money. This optimism can become blinding and prevents us from seeing obvious risks or pitfalls. If we do see them, we may discount them or fail to understand their potential implications.

Everyone that has become successful at investing on the stock exchange has had to start out slowly to learn the ropes (information here).

Understanding the nature of risk is a key lesson that all investors should try to learn before they begin to invest directly in companies quoted on the stock exchange.

Try before you buy

For years, investment newcomers were advised to start by choosing a few companies and investing on paper. In other words, the new investor would follow the progress of the company and share price without actually buying. Each day a new plot on a hand drawn graph of the company would help the investor to understand just a little more. This is known as 'paper trading'.

This idea was first coined long before the dawn of day trading, so was simply the closing price each day. Remember, successful investment is not about following the ticker minute by minute.

Over time, the investor might spot trends between the company and a leading index or sector. The price might move in odd and unpredictable ways causing a desire for more understanding and education to explain these mysteries.

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This desire for new knowledge is a core trait of successful investors. To succeed at investing on the stock exchange, it is vital to firstly keep up to date, but if possible to stay ahead of the pack. This might mean reading trade journals, the annual reports of competing firms, company reviews, interviews and much more. This ongoing education is vital to success.

As computer technology has advanced and investment analysis tools that only a few years ago were expensive and highly specialised have proliferated, the basic learning process for an investor has changed.

Should it?

If plotting points on a graph hepled to truly understand the workings of a moving average or stop loss system, why stop? This used to be 'investment 101' but is now a task to be downloaded. For many investors, it was the most valuable investment they made. They learned to invest and to understand the workings of the stock market. They learned a skill, for others a trade.

This time and investment in learning will help the decision making process of an investor for years to come. It may both earn and save many thousands as the years pass.

It is possible to see the psychology of the market by following daily. Over time, anyone can gradually come to understand why the NYSE or NASDAQ move in the ways that they do. Wall Street can become much less of a mystery.

Is this a process that you have taken? To accompany all the reading and theory that goes with investment generally, paper trading is an important pillar in understanding both investments and the stock exchange.

Whether you used paper trading as a way to improve your investing education or not, it is vital to point out that somehow, if you are to make sound investing or trading decisions, you must get educated! That is the real key to start successfully investing on the stock exchange.

Too much activity?

This, of course, presumes that an investor wishes to be active. There is a lot to be said for newcomers starting out passively (information here) by investing in a managed fund of some sort.

These funds, typically known as mutual funds, offer a level of diversification and low fees that no investor could manage on his or her own. Some of the well known companies that manage money for the masses include Vanguard and Fidelity.

The range of mutual funds is quite astonishing. It is possible to invest in various markets, such as the NASDAQ or Dow Jones or individual sectors. There are also index funds that track an index rather than investing in a range of shares from it. This can offer direct market exposure but reduces the costs to invest and the possibility of fund manager error (otherwise known as under-performance!).

Then there are funds that track a collection of indices, such as the Euro Stoxx 50 (which is made up of some of the largest companies in Europe). These companies are listed in different countries, but the index offers a way to track the value of them and therefore there are collective investment funds that do the same (in much of Europe these funds are known as a sicav). 

There are also ETF funds on the stock exchange. ETF stands for Exchange Traded Fund and these are another very low cost way of getting your money into the market.

Clearly a problem for any investor, no matter how experienced, lies in deciding upon a country, market and fund to invest in. With many tens of thousands of funds available, the private investor needs to give quite serious thought to how and where to invest - after all, virtually every possible permutation is available.

For most people, before they begin with a collective investment fund, they might need to consider their retirement provision. For American readers, 401k and IRA schemes offer tax benefits as well as managed stock market exposure. These can be a great way to start investing on the Dow Jones or other major index.

On the other hand...

There is one potential pitfall with learning to paper trade first. It is a problem that is common now to most common stock ownership. Since the banking crisis of 2008, all the major capital markets have become much more volatile and fragile.

The huge amount of debt taken on by governments and the banking sector has made most other industries and companies less robust.

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This added volatility means that the prices of both individual companies and the national index rises and falls much more often and with more severity. This provides opportunities to trade, but with such complexity it becomes much less easy to predict the direction of the market ... in any timescale.

That would be a problem for any investor at any time, but while a person is learning they might come to incorrectly judge their abilities - for better or worse. It might be that a paper trade turned out to be wildly profitable but for unexpected reasons. In contrast, the decision making might have been right but other unexpected reasons made the pretend trade a loser.

Some of these unexpected changes to stock market sentiment can be literally from anywhere - suddenly emerging market bond prices scare investors, or the return of the eurozone crisis spooks the bond market. Predicting these issues in our hyperconnected world is almost impossible. This means that stock investing really only be for people to buy and hold for a very long time or short-term traders that are fleet of foot and will be in and out of a position in hours or days.

If all of this makes you think that there is a bewildering range of potential options, you are right. Getting your investment career started is going to require some thought...

Beginners Guide - Homepage

Stock Exchange Beginners Guide - Part 1

Stock Exchange Beginners Guide - Part 2

The Suitability Of Stock Investments

Looking For A 'Ten Bagger'

Why Should You Start To Invest On The Stock Exchange?

6 Great Subjects For Learning About The Stock Market

What Is The Stock Market?