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Important DIY Investment Concepts That You Need To Know

The development of online stock trading in recent years has spurred an increase in do-it-yourself (DIY) investing. This means people managing their investment portfolios themselves through discount brokerages and internet trading platforms, rather than employing traditional full-service brokerages to manage them. While this type of investing has its advantages, especially in terms of costs, it requires investors to become more knowledgeable than they had to be before.

This article details some of the important investment concepts that you need to know before you begin investing on your own.

1. Buy Low, Sell High

One of the most important investment concepts may seem obvious: buy a stock when it is near its low and sell it when it is near its high. But a surprising number of investors fail to follow this. They only buy a stock after it has achieved some buzz and is rising. These same investors will often sell the same stock after it has fallen a certain amount. This typically leads to them buying the stock when it is close to its high and selling it when it is close to its low, which, in turn, can lead to a loss.

Instead, you should look for stocks that you believe, through your research, to have good growth potential. This means stocks that you expect to rise in price after you buy it. Also, unless you anticipate holding the stock long-term, you should come up with a good exit plan before you buy the stock.

In essence, you should know at what price you want to buy a stock and at what price you want to sell it. To control these prices, with robo-advisors like Questrade, you can set a stop or limit order when purchasing or selling a stock from your investment portfolio.

2. Individual Stocks vs. Stock Funds

While you can research and buy and sell individual stocks, if you are a new investor, you may find it easier to buy a stock fund instead. Stock funds are collections of stocks picked by others, which you own as if you owned all the individual stocks within the fund. There are two main types of funds: mutual funds and exchange-traded funds (ETFs). Mutual funds are sold by investment companies while ETFs are bought and sold on exchanges just like stocks.

Funds charge a management fee for their services, and these can vary significantly. So, when comparing funds, it is important to not only look at their historical returns but also at their fees, as even a small percentage difference can matter. Mutual funds, by their very nature, generally have higher fees than ETFs. ETFs also usually incur less taxes as well.

As there are many funds to choose from, you may want to consider using help from a robo-advisor when selecting one.

3. Diversification

Because of the many inherent uncertainties that relate to investing, it is important to balance your investment portfolio by diversifying it. This way if the value of one particular investment falls considerably, your entire portfolio does not fall with it. Conversely, an investment could rise significantly, and by owning a broad range of investments, you will increase your likelihood of profiting.

You can diversify your investment portfolio in several ways. One is to own various classes of assets, such as stocks, bonds, and real estate. But you can also diversify your investments within a particular class of assets. For example, you can own a diverse set of stocks (or funds) that vary by the sizes of the companies, their industries, or their locations.

4. Active vs. Passive Investing

You can approach investing in either an active or passive manner. Active investing means that you are constantly adjusting your investment portfolio in an attempt to outperform the market. With passive investing, you maintain a nearly constant set of investments in an attempt to follow the market. In the latter approach, you typically buy securities such as index funds, which match the performance of a stock index, such as the S&P 500 or Dow Jones Industrial Average.

Both investment approaches can result in profitable returns. But if you do not know much about stock investing, or you do not have the time to actively manage your portfolio, passive investing may be a better approach for you. At times, it can even generate better profits than an active approach, especially for those who are novice investors.

It should be noted that most stock funds follow one of these two approaches.

Now That You Know, You Can DIY

DIY investing can be very rewarding. It just requires a little knowledge. Through understanding investment concepts and a little bit of research, you can manage your own investment portfolio.

| By Leo Gutierrez

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