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5 things you should know before you start investing

Updated: May 9

Here are some things you should understand before you begin your investing journey. And don't worry if you get confused we have live help just click the blue button below to chat, text, or send us a message.

We believe in taking the long view when investing. Of course, some investors like to actively trade the market and we have a swing trading account ourselves. If you are thinking about trading, or are already doing so, here is a 5-step guide that you might consider.

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Take into consideration Investing Objectives, Risk Tolerance, Time Horizon, and your personal Tax Situation

1. Have a well-thought-out investing and trading plan

For people not interested in following the market or actively trading we believe that having a long-term investing plan will help you achieve better outcomes.

Here are 4 key things to know about your specific situation to help you build a comprehensive investing plan:

  • Investing Objectives

  • Risk Tolerance

  • Time Horizon

  • Tax situation

A well-thought-out investing plan will incorporate these factors, enabling you to find the right asset or stock portfolio mix (i.e., the types and percentage of stocks, bonds, and other investments that compose your portfolio) and strategies to help you accomplish your investing goals. In addition, you should factor in any unique circumstances that apply to your specific situation. Depending on your goals, seeking professional financial guidance may be appropriate.

If you are interested in actively trading, you should also think strategically about how much of your portfolio you are comfortable trading. Make sure you have a risk management plan as well. You'll want to ensure you preserve your capital if a setup fails so you can invest another day.

We do not believe that investors should be actively trading with all or most of their investment funds.

Instead, we think that you should first build a diversified portfolio that aligns with your investing objectives and risk constraints. No matter what your age or objectives, we believe this means being diversified within different types of stocks, bonds, and other investments.

One benefit of diversification is that it can help you manage your risk. We believe that you should always manage your risk—by choosing an asset mix (and associated long-term risk level) that is appropriate for your current circumstances, and creating diversification within that asset mix to improve your risk/return relationship.

Then, if you fully understand the risks involved, you might choose to set aside some percentage of your investment funds to use to trade. Having a plan will help you determine what percentage of your funds you believe it’s appropriate to use to trade. If you are already trading with some percentage of your funds and you haven’t yet considered the risk involved, you should think about it.

2. Fully research your idea and use best practices when making a trade

Of course, diversification won't ensure gains or guarantee against losses. You still need to do your own research—especially if you are investing or trading for yourself. Here is an approach that you might consider for researching and actively trading an investment opportunity:

Finding new ideas—There are many ways to generate investing ideas from what you know like Disney or Coca Cola. You can invest in brands you may purchase such as Nike, Apple, Beyond Meat or Five Below. "Use your specialized knowledge to home in on stocks you can analyze, study them, and decide whether they are worth owning," Peter Lynch says. You can also use insights and investing ideas from sources that you have determined are reliable. Online screeners can help you search for and generate stock, ETF, and mutual fund investing ideas based on both fundamental and technical factors.

Start with the fundamentalsWe believe that the fundamental factors of an investment opportunity drive its performance over time. For example, earnings—which are a fundamental factor—are the core driver of a stock’s performance over time. While there can be short-term fluctuation, a company’s ability to generate earnings will dictate how the stock does over the long run. A fundamental approach might involve researching earnings, price multiples, and free cash flow for an individual stock, stock ETF, stock mutual fund, stock option, or other investment candidate. For bonds, bond funds, or ETFs, fundamentals might include cash flow and credit quality. You might also look at broad macroeconomic trends—like GDP growth, the jobs market, and productivity levels—as well as the phase of the business cycle and trends in different markets and sectors. You might also choose to incorporate independent experts’ analysis and ratings; to help assess those opinions, consider using the Thomson Reuters StarMine Equity Summary Score (on, a single stock rating of third-party analyst opinions that is weighted based on how accurate they’ve been in the past.

Layer in the technicals—Fundamental analysis can help you decide what to buy and sell, and why. Once you’ve researched all the fundamental factors of an investment, you might then consider using technical analysis (e.g., using charts and data to spot trends, patterns, and price entry and exit points) to help you decide when and at what price to buy or sell. Among the most popular technical tools are moving averages, support and resistance, and relative strength.

3. Plan for a trade

Once your fundamental and technical analysis is complete you can then start planning for a trade.

This can range from buying or selling a stock, bond, ETF, mutual fund, or other investment to executing more advanced strategies—such as buying or selling options.

Remember: To learn more about these assets or anything within the artilce you arent' familiar we are here to help your understanding just click the blue button below and ask a question or schedule a free session

You may also want to incorporate screeners and back testing software to help find any flaws and get a sense of the risks inherent in a trading strategy or idea. This approach may involve testing short-term strategies, like trading earnings, or longer-term strategies, such as sector rotation. Just as you need to assess the risks associated with an individual investment opportunity, you should also know the risks associated with a particular strategy.

A few keys to planning for a trade are having an entry and exit strategy to help manage risk and maintain a disciplined trading system, understanding what strategies and tools are at your disposal to help set up the trade, and knowing different order types to optimize your trade. For help with this, consider trying Fidelity's Trade Armor®—a visual tool that helps you assess price levels at which you'd like to buy and sell.

Having an entry strategy can help you position each trade for success. It can also help you navigate volatility in the event that things change (i.e., a market-moving event, earnings announcement, or any other significant news item) between the time you decide to make a trade and when you are ready to pull the trigger.

An exit strategy, in many cases, may be just as important. Emotion can be a powerful enemy when trying to make information-driven, dispassionate decisions. Having a plan for when things go right, or wrong, can help remove emotion from the equation. An exit strategy might include knowing your time horizon (e.g., is this a trade that you are looking to close within a few weeks or months, or over a much shorter period of time?) and risk tolerance (e.g., what percentage of your investment are you willing to lose?) for the particular trade, among other factors.

Some of the tools previously mentioned, like a watchlist, as well as resources like practice trading platforms, can be invaluable when planning a trade. There are also apps and play accounts you can use before you actively trade if you wish to test the waters. When you move from planning a trade to placing a trade, order types can help you put your strategy into action. Plan for success by knowing how order types work, when they are best applied, and the limitations of their use. E-Trade, Investopedia, and Investors Business Daily have videos you can watch to understand trade orders and how to limit your risk. Youtube is also a great resource!

4. Placing a trade

Finally, after you’ve done all your research on an investment candidate and decided on a strategy, now you can execute a trade. You'll want to select a broker that offers the trading capabilities that you require, has top rated execution, and offers a trading platform that you are comfortable using.

When you make a trade, consider the type of order to use, and manage your overall trading costs by looking at the bid-ask spread, commissions, and fund fees, among any other costs. Also, different types of investments can have varying trading characteristics, so you will want to be aware of what the best practices are for each type of investment. For example, Fidelity's ETF services group suggests these 3 best practices when buying and selling ETFs: Pay particular attention to bid-ask spreads, always consider using limit orders, and avoid trading near the market open and close.

Regardless of your strategy, it is critically important to recognize that investing involves the risk of loss, and those risks can be greater for many shorter-term strategies. While having a plan that aligns with your objectives and risk constraints can help you avoid strategies that expose you to more risk than you are willing to take, you still need to do your research to know the risks of a specific strategy or investment opportunity.

5. Monitor your positions and adjust them as needed

You should check your investment mix at least once a year or any time your financial circumstances change significantly. We recommend quarterly, bi-annual, and annual reviews. However, if you are making short-term trades, you should monitor your positions more frequently, depending on your time horizon.