Now, before you go crazy thinking that stock investing carries so much risk that you may as well not get out of bed, take a breath. Minimizing your risk in stock investing is easier than you think. Although wealth-building through the stock market doesn’t take place without some amount of risk, you can practice the following tips to maximize your profits and still keep your money secure.
Gain knowledge
Some people spend more time analyzing a restaurant menu to choose a $10 entrée than analyzing where to put their next $5,000. Lack of knowledge constitutes the greatest risk for new investors, so diminishing that risk starts with gaining knowledge.
The more familiar you are with the stock market — how it works, factors that affect stock value, and so on — the better you can navigate around its pitfalls and maximize your profits. The same knowledge that enables you to grow your wealth also enables you to minimize your risk. Before you put your money anywhere, you want to know as much as you can.
Stay out of the stock market until you get a little practice
If you don’t understand stocks, don’t invest! But that doesn’t mean you should be 100-percent invested 100 percent of the time. If you don’t understand a particular stock (or don’t understand stocks, period), stay away until you do. Instead, give yourself an imaginary sum of money, such as $100,000, give yourself reasons to invest, and just make believe (a practice called simulated stock investing or trading).
Pick a few stocks that you think will increase in value, track them for a while, and see how they perform. Begin to understand how the price of a stock goes up and down, and watch what happens to the stocks you choose when various events take place. As you find out more about stock investing, you get better at picking individual stocks, without risking any money.
A good place to do your imaginary investing is at a website such as Investopedia's simulator. You can design a stock portfolio and track its performance with thousands of other investors to see how well you do.
Put your financial house in order
Before you invest, you want to make sure that you are, first and foremost, financially secure before you take the plunge into the stock market. If you’re not sure about your financial security, look over your situation with a financial planner.
Before you buy your first stock, here are a few things you can do to get your finances in order:
Have a cushion of money. Set aside three to six months’ worth of your gross living expenses somewhere safe, such as in a bank account or treasury money market fund, in case you suddenly need cash for an emergency.
Reduce your debt. Overindulging in debt was the worst personal economic problem for many Americans in the late 1990s, and this practice has continued in recent years. The year 2011 was another year where bankruptcies hovered near 1.5 million. In 2012, total college debt surpassed $1 trillion for the first time.
Make sure that your job is as secure as you can make it. Are you keeping your skills up-to-date? Is the company you work for strong and growing? Is the industry that you work in strong and growing?
Make sure that you have adequate insurance. You need enough insurance to cover your needs and those of your family in case of illness, death, disability, and so on.