Last time we have reviewed the initial steps that the investor should take before taking his first action in the market. In part 2 of the post we would like to review the virtual portfolio investment method and recommend on the various tools suitable for a beginner in the market.

Build and manage your virtual portfolio:

 After you have gained sufficient theoretical knowledge the next step is to open a virtual portfolio which means buying assets with virtual money. This process requires the recognition of trade rules and understanding the tools available to the investor coping with the various dilemmas – what to buy? How? When? (of course the selling process is as significant)

This step is high recommended for the beginner as he gains experience on the various share types, the various market terms and orders (limits, stop loss etc) and all this without risking a dime of his own money. But despite the above said, there are also problems with the virtual portfolio:

Trading psychology is somewhat disconnected (as no real money is involved), no sense of fear or greed, no sense of missed opportunity, nor the cognitive dissonance experienced when forced to sell a stock and it continues to rise… However we strongly believe that this process should take several months and during that time the investor should keep a detailed log of all the considerations, decisions made and performance of the portfolio.

These are used to define and asses the method of work, but mainly for drawing conclusions for the decisions taken. Only after the passage of all these steps, there is room to invest with real money. Also then our recommendation is to take it with carefully measured steps.

In which financial instruments should the beginner invest?

 As the level of financial instrument is higher and the tool is more complex, it requires more knowledge, and bares a higher chance of profit, but it also risks. My recommendation is unequivocal, the first step to deal only with mutual funds,ETFs, bonds and shares. The other investment tools are not as simple as they seem, and might result in painful losses as they carry a high risk. This sums the beginners section – so I guess you have some work to do. Good luck!