There are many people aspiring to make it big in the stock market, but are worried about the humungous financial losses that this financial tool is said to cause due to wrong strategies and moves. But one should not hope since this is the market where geniuses like Warren Buffs have made from rags to riches stories and are indeed great aspirations to those who seek fortune in the stock market. There are numerous books, blogs and sites that provide valuable tips and strategies for making money in this market. You being an individual investor are to know that this system stacks its decks only in its favor.
Buying & selling securities
Thousands of investors are engaged constantly in purchasing and selling corporate securities on NASDAQ or any of the authorized stock exchanges in the country and are quite successful. It is not sheer luck that makes them achieve success, but few principles that they have learnt from the experiences over timeless stock market cycles and shared by millions of investors.
How to become rich in the stock market?
You may perhaps be looking for some easy way to make riches from the US stock market. Some people do purchase a common stock which might quadruple in a year or even more! However, this aspect is quite unlikely, as relying only upon luck as the main investment strategy will be really foolish. Often, we have the tendency to overlook some of the powerful tools provided, which is compounding interest and time. With regular investment, avoiding unwanted risks as well as allowing your money to work on your behalf over period of time, say decades will help you to amass good amount of assets.
Useful tips to invest in the stock market for beginner investors
· Understand risk tolerance: It is rather a psychological trait considered to be genetically based. However, wealth, income and education possessed can influence it positively, while age affects it negatively. It is your degree of anxiety experienced when facing risk it is also affected by your perception of risk. Perception is of great significance, especially when investing. With more knowledge on investments, like how to buy and sell stocks, amount of volatility present, ease or difficulty to liquidate an investment, etc., the risk experienced with stock investments will be much less than what was witnessed during the first purchase. With proper understanding of risk tolerance, you will be able to avoid those investments that will otherwise make you anxious. Avoid owning an asset that gives you sleepless nights. It will be useful to follow analytical decision process to achieve success.
· Set long term goals: You need to ask yourself the following questions:
o Why invest hard earned money in this market?
o Will cash be required in 6 months, a year or five years or even longer?
o Is there sufficient savings for retirement, to purchase home, for children’s college expenses or leave behind an estate for your beneficiaries?
It will be necessary to understand your purpose very clearly as well as to time the future, where you might require funds to meet family and study expenses. Knowing amount of capital required and when it will be required in the future will help you to calculate the investment amount and the kind of returns to be achieved from the investment. Several stock brokerage sites do offer calculators. Portfolio growth depends upon three interdependent aspects, namely:
· Amount of capital to invest
· Net annual earnings on capital
· Investment period
· Control emotions: Inability to make logical decisions and control your emotions is undoubtedly the biggest obstacle faced to attain stock market profits. Company prices, in short term, reflect combined emotions of the investment community as a whole. The company that is viewed positively by majority of investors is able to witness increasing stock price and vice versa. Negative market feeling is known as ‘bear’ and positive is termed ‘bull’. The short term movements rather are driven by hopes, emotions, speculations and rumors, instead of systematic company asset analysis, prospects, management and logic. Hence, you need to have valid reason to buy a stock and expectation of the price. You need to have proper exit strategy prior to purchasing the security and execute it unemotionally.
· Diversify investments: You need to undertake necessary research so as to identify as well as quantify your risks. Also will be required to identify all potential dangers which might otherwise endanger your position. You should in a better position to liquidate your investments to avoid catastrophic loss. Your initial investment decisions in the stock market should be very much careful. Diversifying your exposure will help to manage risks. You can own different company stocks in different industries and in different countries. This way, a single unfortunate event is not likely to affect your holdings. With properly researched diversification, you can recover from total investment loss (20% of portfolio) through 10% gains in two best companies, like 25%x40% including 4% in remaining two companies (10%x40%). Although overall portfolio value may drop by 6% (which is 20% subtracted with 14% gain), it will be really good when compared to investing in a single company only.
· Manage basics first: You need to learn the stock market basics and about individual securities. You need to know the old adage “This is market of stocks and not stock market”. You need to focus upon individual securities and not the entire market. Some of the areas that you need to be familiar about are:
o Popular methods to select and time stocks: You need to know how to perform technical and fundamental analysis, how it differs from one another, where each is appropriately suited in the stock market strategy.
o Financial metrics: Get to know the metrics definitions like earnings per share, P/E ratio, compound annual growth rate, return on equity, etc. It is crucial to know how to calculate and use the metrics to compare different companies.
o Different investment account types: The common ones are cash accounts, while certain trade type regulations require margin accounts. Margin calculation and different between maintenance and initial margin requirements need to be clear.
o Market order types: You should be aware of the difference that exists between limit order, market orders, stop limit orders, stop market orders, trailing stop loss orders, etc. used commonly by investors.
Therefore, knowing the above parameters can help you to avoid risks when investment money in the stock market and increase leverage of making profits from your ventures.