Investing in the stock market is, surely, a wise way of making money but you have to understand what the stock market is all about and how it generates profits before you can understand how investors make money in the market. The stock market is a place where shares of pubic listed companies are traded.
Though, quite a lot of people have made it big in the stock market, trading in equities is not all that easy. One needs to be disciplined and patient as he or she embarks on research for thorough understanding of the capital market.
A stockbroker, Mr. Olubunmi Ayeni, said as an investor in stocks, one needs to focus on total return and make a decision to invest for the long-term.
This, according to Ayeni, means at an absolute minimum, expect to hold each new position for five years, provided you’ve selected well-run companies with strong finances and a history of shareholder-friendly management practices.
“That is the way real wealth is built in the stock market for outside, passive investors,” he said.
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions
Rules for stock market investment
Make informed decision;
Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. This is, however, not the right way of putting one’s money into the stock market.
Understand the two types of traders
There are two types of traders in the stock market. There are those that follow fundamental investing, and there are the speculators. Both of them see the prices of stocks differently.
The fundamental investors give less importance to price of stock compared to the speculative investors. Such traders are more concerned about the fundamental strength of any company. However, it is important to practice the fundamental aspect of investing in order to make good money.
Be disciplined in your approach to investment
Due to high volatility in the stock market, many investors have lost money even when the market has a bullish trend. At the same time, all those investors who have put in their fund with disciplined approach have generated outstanding income. If you have long term gain in mind, do have a systematic approach for investing.
Invest in business you understand properly
Before investing in a company, you should know what business the company does . Invest in a business that you understand.
Always invest your surplus funds
If you are a beginner in the trade, always use your surplus funds for the investment. Once you start making profit, you can re-invest the profit rather than opting for loans or debts.
Have a realistic goal
Most times, traders can hope for the best from the investment they have made. But if they have financial goals that are unrealistic, they might get into some real trouble. Never expect the same returns from stock market and always have realistic and achievable goals.
Create a broad portfolio
Diversification of portfolios across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. Level of diversification depends on each investor’s risk taking capacity. Get a stockbroker by your side for advice.
Do not let emotions becloud your judgment
Many investors have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. In a bullish market, the lure of quick wealth is difficult to resist. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time. “This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,” says an investment analyst.
Have realistic expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years.
However, it doesn’t mean that you should always expect the same kind of returns from the stock markets. Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely inviting trouble for yourself.
