Starting out in the world of investing can be a rather daunting task, but when you have some direction and a strategy geared towards the financial goals that you intend to achieve, the road ahead starts to become less intimidating.
When you start out as an investor in the stock market, it is important to decide on the level of risk that you are prepared to expose yourself to. There are quite a few factors that need to be taken into consideration before putting all your money into your first stocks.
Age is a very important factor when trading and if you are 55 years of age or older you should be avoiding unnecessary risk, because if you make any financial mistakes it is unlikely that there be enough time to regain your money from those losses. The amount of time that you have at your disposal will also determine how active you are on the market.
There are three basic types of investors:
1. The conservative investor will usually be close to retirement and have a larger amount of capital and time, but may lack the expertise of trading in their personal capacity and will prefer to approach a financial institution, where they can be assisted by a fund manager that will be able to identify the needs of the investor and help meet those needs through a range of funds spread over the market.
In these circumstances the trading in the funds will be done through a financial advisor instead of a stock broker. The investor is usually able to switch between funds in positive or negative markets at the advice of the financial advisor, which will ensure that any opportunities are taken advantage of and that the investor’s capital is safe during any downturn in the economy.
The conservative approach will give the investor security at a lower level of return on their capital. Preserving capital and staying above the current level of inflation will be the main objective.
2. The moderate investor has a long term approach to stock trading and will spend a considerable amount of time searching for stocks in different sectors that have value and future growth potential.
This investor will aim to buy these stocks at the lowest possible price and then hold onto them for as long as they have growth or growth potential.
The main objective will be wealth creation, capital preservation and a moderate return that is above the rate of inflation and is able to withstand any changes in the economic climate.
3. The aggressive investor is generally young, very competent with an extensive knowledge in stocks and the stock trading. They spend a great deal of time on their investments and expect the highest return possible.
Speculation forms a large part of this short-term investment strategy, with the stock selection aimed mainly at stocks that offer smaller more frequent gains. Trading only in a few select stocks, the trader will take advantage of support and resistance lines in an aid to buy and sell as close as possible to the line, yielding the highest return.
Aggressive trading is usually pursued as a career or as an income supplement, with profits being reinvested in more secure stocks.
Establishing the trading category that best identifies your risk preferences to the stock market will enable you to take the correct steps to plan your investment strategies, as well as the knowledge and time that you will need to reach your objectives.