If you are a first-time stock market investor or wanting to be one soon, then these are the 4 things you need to keep in mind when it comes to the business of investing in stocks.
It’s not that difficult actually! And plus you cannot just rely only on stock tips that you get from your friends and TV news if you want to succeed and become a smart investor. It is easy to get a barrage of info and tips on trading, but very difficult to make money out of them. It is better to do it all by yourself. You should be doing all the fundamental research and analysis before investing in the stocks of companies. You have to spend time working on charts and understanding structures to be able to trade independently. While it might seem like a lot of work in the beginning, it is a worthy investment of your time and energy, that will reap rich dividends eventually and save you from costly mistakes as well.
When you set out to build your portfolio, your aim must be to include stocks from varied industries and categories that are different from each other. This is essential for reducing risk, especially in the long-term. Portfolio diversification is very important as it helps us to minimise our non-market risk. Non-market risks are those that are under an investor’s control, because they are directly linked to the company’s performance. Whereas market risks are those that are linked to macro-economic events like recessions, changes in interest rate, natural disasters, etc. These cannot be controlled by you – the investor. So better to focus on cutting down your non-market risks.
The primary goal should be to invest in companies with a strong business model, making profits consistently and enjoying a leadership position in the market segment. These companies make good returns on equity and generate strong cash flows, which allows them to return the excess money to shareholders in the form of dividends. However, when you are Investing in a good company, you need to be focussed on buying the stock at a good price. A good company can still be a bad investment if you buy it at a time when the stock price is too high. In fact, that’s one of the most common ways of losing money in the stock market. So never overpay for a stock.
Showing your emotions and being your true human self is important on many occasions in life and can indeed be a great thing. But not when it comes to investing. Being emotional will lead to you making bad decisions that result in costly mistakes. You have to always be aware of the subtle difference between being right and being in the money. You wouldn’t care if you were wrong when you’re laughing all the way to the bank.
