If you’re smart about your personal finances, then you’ve already been doing the basic things that you need to do to grow your wealth. You’ve made a budget, and you’re careful not to spend more than you’ve earned. You’ve stashed away some cash in an emergency fund and you have put savings beyond that in high-interest savings accounts and — better yet — investment accounts, especially tax-advantaged ones. You’re doing the basics, and that’s great.
But do you know why you’re doing this? And do you want to stop here, or are you feeling the itch to get more active and more aggressive as you invest?
It’s wonderful that you want to go further with your investing. To do so wisely, the key will be to expand your expertise faster than your ambition. Take things step by step and master basic investment strategies before moving on to more complex moves or becoming a day trader. If you move carefully and cleverly, you could turn your aggressive investment dreams into a sensible and lucrative strategy. Let’s start from the beginning and lay out your path forward.
The first thing that any aspiring investor needs to understand is the point of this whole thing — why are we investing, and what is the goal?
The goal, of course, is to build wealth. And the reason that investing is such an effective way to do that is that basic and even relatively conservative investing strategies tend to beat inflation. Inflation robs our cash of its value over time, but the stock market’s continued growth offers us an alternative to this frustration.
Basic investment strategies
Getting these inflation-beating results from our investments isn’t too tough. While nobody can guarantee results on the stock market, even very simple and conservative investment strategies have historically done well relative to inflation.
The first two things you should understand as a new investor are long-term buy-and-hold strategies and the importance of diversity in your portfolio.
In a buy-and-hold strategy, an investor will target reliable stocks and stocks that they see as undervalued by the market. They buy these stocks and simply hold onto them for years and years. You might not cash out until you’re retired! Of course, even “blue chip” stocks are not perfectly safe. To limit your exposure to risks associated with any one stock, diversify your portfolio with other stocks or with funds that include or track the value of multiple stocks. An index fund, which tracks a market index like the S&P 500 or Dow Jones Industrial Average, can be a great way to invest in relatively stable diversity.
Knowing when to sell
For some people, investing in index funds and other basic options (such as target-date funds) will be all they ever need to do. For others, this might be just the beginning of a journey that will introduce them to much more complex stock-trading strategies.
One of the simplest ways that you can take your investing to the next level is to know when to sell stocks. Rather than just holding on forever, you could try to get out with profits and then buy back into specific stocks — or the market as a whole — when prices are low.
The problem? Timing the market is as hard to do as it is simple to explain. You’ll want to get very good at reading financial news and following financial advice, and you should offset any big bets against the market with a slow-growth nest egg that you leave untouched.
Options and shorting strategies
You can do a lot by simply buying or selling stocks. But those sorts of direct transactions are not your only options for making money on the stock market.
You can also use options, including call and put options. You’ll want to read up carefully on options trading for beginners before you get started, though, because with new opportunities come new risks.
Options are one way that you can “short” stocks. You can promise to sell stocks that you don’t even own — or you could make less risky bets by covering yourself with additional options contracts. Do your research and build up to this level. Once you’re there, you’ll find powerful ways to take very aggressive positions in the market.