You’re essentially buying a piece of a firm when you buy a stock. That piece of paper is a share of ownership, and it entitles you to a portion of the company’s assets and profits. The wealthy have historically benefited from exclusive access to investing information and guidance. With today’s technology, would-be investors have access to a plethora of information, but much of it is cluttered with industry jargon and difficult-to-understand advice. Here are ten pointers for newcomers who want to get the most of their money by investing in stocks:
Take a look at your financial situation
Make sure you have the cash to make the commitment before you invest. A decent rule of thumb is to have little or no debt and a six-month emergency savings account. If you have a strong financial basis, you may be able to start investing in stocks.
Consider the risk vs. reward ratio.
It’s simple: if you want better returns, you’ll have to invest in riskier companies. You’ll have to settle for lesser returns if you don’t want to take on riskier investments. The majority of investors lie somewhere between being very risk-averse and incredibly risk-ready. That is why it is critical to…
Diversify
Companies differ in size, industry, volatility, and growth trends (ex. growth and value). The most successful investors diversify their portfolios by investing in not just diverse equities and mutual funds, but also different types of funds with varying levels of volatility. When the dot-com bubble broke in 2000, you lost everything if you placed all your money into technology stocks in the 1990s.
Don’t let your emotions get the best of you
Investing is a long-term commitment that is often made to supplement retirement assets rather than to support your next major buy. Traders that trade too often depending on market changes make it more difficult for themselves. Market behavior is frequently built on the alternating qualities of excitement and fear in the near term. However, in the long run, a stock’s worth will be determined by the bottom line—company earnings—and firms with a strong basis can survive a lot of criticism.
Determine the volatility of a stock.
Look at a company’s rolling 12-month standard deviation over the last 10 years to predict its volatility (and hence avoid your own emotional reaction to a rapid decrease in stock value). Look at the stock’s average performance during that time period in layman’s words. A typical standard deviation is around 17 percent, which indicates that a 17 percent gain or decrease in the value of a stock is entirely normal.
Keep these tips in mind and go ahead with securing the most out of stock market investments.