The Two Golden Rules for a First-time Stock Market investor

Entering the stock market as an investor for the first time is a thrilling experience. You are now part of the game and not just a spectator. However, to not stumble on your first steps, it is essential to set yourself some rules beforehand and abide by them as they are the law.

The first rule of investing in the stock market is that revenue is inseparably tied to risk. The higher the expected revenue, the higher the risk. Fact. The second rule for the first time investor is only to invest money you can afford to lose without threatening other parts of your life.

I followed these rules when starting my stock market experience and follow them ever since. In the following piece, I will explain these rules and the background further to help you make your first stock investing experience a successful one.

First Rule

Make sure you internalize the first rule as it is the law of nature.

Revenue is inseparably tied to risk.

There will be so-called advisors or experts to tell you all kinds of fairytales. They will load up their marketing cannons and promise you a fail-safe 8% revenue every year as long as you give them your hard-earned money. This can’t be further from the truth, and I will tell you why.

As such, the stock market might look like an entity that works by unknown rules and favors those who are ‘lucky’ or just had a good shot. The reality is quite simple, in fact. It’s just the conglomeration of many transactions, which all follow the same principle.

Imagine you live in a small rural village, and next to your house, there lives a farmer who owns the fields around the village and uses them to farm crops. In a given year, he decides to buy some additional farmland. He can’t afford it on his revenues and therefore asks you to invest in his venture. If you decide to give him some of your money, he promises you to pay five percent on your invested capital every year as an incentive if he makes profits. This is the dividend part of stock profits.

By acquiring new land and increasing his revenue, the farmer as a company becomes more valuable. As you are holding a fixed share of his company, your share rises as well in worth. This is the share value part of stock profits.

Unfortunately, the farmer can’t guarantee that he will make good a good harvest every year. Maybe there is bad weather, or the crops get some pest. If he fails to get the revenue out of his lands, he can’t pay your five percent. He may even file bankruptcy after three bad years in a row, which means all of your capital is lost and gone.

This is the reason why revenue is tied to risk. By effectively financing ventures, you are putting your investment at risk. The stock market is the conglomeration of many of these transactions. Every transaction means that you entrust a business person your money to finance his venture in expectation of revenue. If the businessman fails to have success for whatever reason there might be, you are suffering losses as well.

Second Rule

The second rule is a direct consequence of the first rule. If your invested money is at risk, you must make sure the loss doesn’t affect other parts of your life.

Never invest money you can’t afford to lose.

You may be tempted to invest your savings or the money reserved for the down payment of your house. The sight of quick revenue might make you think it would be stupid to let go of extra percentages.

No.

As the first rule always applies, your money is at risk. Therefore, start with a little investment. Pick an amount of money or maybe a couple hundreds of dollars or make it even a thousand dollars. Just make sure it is money that couldn’t be surrendered without harming you.

Harming means that the money is not saved for another purpose. This might be purchasing that new washing machine, your vacation money, or your emergency fund.

Think of your first encounter at the stock market as school fees. The money you invest will help make your first experiences and learn a lot about the stock market and yourself as an investment person.

It might turn out that keeping your money at risk makes you have a bad night's sleep. Another possible outcome is that you are eager to learn more about the stock market and make it a part of your retirement plan. Either way, your first steps in the stock market are reserved for learning and getting to know yourself.

If you run into the market guns blazing because some co-worker had this fail-safe tip on this or that stock, you might burn your fingers. In Germany, this happened in the 1990s when the former state-run phone provider went to the stock exchange. It was highly marketed and advertised as ‘people’s stock,’ so many first-time buyers got substantial amounts of stocks from this company and this company alone. It turned out the dot-com hype mainly drove it. When noting at its height in the year 2000 on more than five times the emission value, it dropped to nearly half the emission value by 2002.

For many first-time investors, this was a painful experience, and since clouded their relationship with the stock market. Many people here in Germany are still referring to the stock market as a casino or lottery where revenues are determined only by luck.

I don’t want you to burn your fingers but build a stable relationship with the stock market. In my opinion, it is one of the rare opportunities in our low-interest environment to gain substantial revenues in the long run and build up your retirement.

There you go. Pick an amount of money you can afford to lose and make your own experiences. Find out which style does suit you and do not get greedy with your first profits. Always remember that investing is a long-run business, and therefore, there is absolutely no reason to rush.

The Takeaway

The stock market is a great opportunity for building wealth in the long-term. As a first-time investor, make sure that you set yourself some rules and limitations to avoid burning your fingers.

Always remember that revenue is tied to risk. The higher the expected revenue, the higher the risk. There is no shortcut to this fact, no matter what others say.

Following this, make sure you never invest money you can’t afford to lose entirely. Don’t get fooled by greed and opportunity.

Investing is a game that is won in the long run. Take your time to learn, and you will succeed.

Best wishes.

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This article is for informational purposes only and should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.