If you are following the news daily, you must have heard countless news about companies or individuals losing or gaining immense amounts of money through investing.
And of course, by now you are already curious of how it works.
Investing in stocks in one of the easiest, most profitable, and best ways to earn and accumulate wealth over the years. Being a beginner, we understand that you may feel frozen in front of the rapidly rising and falling stock market.
Before we give you any advice about this confusing but rewarding maze called “stocks investment,” we’ll give you the basic definitions of terms you need to remember, and the general idea of investing. So sit back, relax, enjoy, and read on!
What is a stock?
In simple words, a stock is share in a corporation or an entity. When you buy a stock, you obtain shares of that corporation’s earnings and assets.
Stocks are divided into two general types.
The first one is called “common stocks,” which gives you the entitlement of a proportion of a company’s profit or losses.
The second one is called “preferred stocks,” through which shareholders receive a specific dividend at schedules times.
You can choose one, or you can choose both!
Now that this word is practically clear to you, we’ll give you some useful advice on how to invest with the confidence you need.
Tip number 1: Learn the Basics First
As an aspiring investor, you cannot just jump into the ship without learning the ropes first, and mastering the know-hows of the market.
You should be familiar with specific areas first before digging deeper.
Financial Metrics and Terminologies
– aside from the word “stocks,” you should also know about terminologies and phrases such as earnings per share (EPS), return on equity (ROE), and compound annual growth rate (CAGR). You must know how to calculate these things, and when you do that, you’d be able to compare different companies (from which you’d buy your stocks) using these metrics. And having that ability is very crucial for a beginner investor like you.
Stock Selection and Timing
– you must have the basic understanding of fundamental and technical analyses, so that you would know which move best suits your stock market strategy. You must know some rules when it comes to stock selection.
In this sense, you’re like the General in command of your own battalion of soldiers, which are basically the bucks you’re pouring on investments. You cannot tell them to take on the enemy, which is the stock market, without having a battle plan, or a war strategy.
Your main goal, as the leader of your army, is to beat the market by earning as much as possible.
– you might need to find a dictionary or scour the cyberspace for definitions and explanations (we’re here to help you, by the way), but it is extremely rewarding to do those things. Have a research on the differences between market orders, limit order, stop market orders, stop limit orders, trailing stop loss orders, and many other types commonly used in the stock market.
-there are a lot more things for you to learn, but you cannot go into the battle field without understanding how margin is calculated, and what differences initial and maintenance margin requirements have.
Warren Buffet, one of the most successful (not to mention one of the richest) investors in the world, said that “risk comes from not knowing what you are doing.”
Tip Number 2: Set Goals
By this time, your goal must be clear: to get rich.
However, that is not the only goal you should think about. Of course, that is your main and ultimate target, but to achieve that you need to achieve smaller and more specific goals as you go in the jungle of the stock market.
You first need to ask yourself why you want to enter the market. You have to know for which thing you are doing this. Is it for your future expenses? Are you planning to put up your own company? Are you thinking of an early retirement? Or do you just want to secure your family’s future?
Once this thing is determined, you need to set a timeline for it. Will you be traveling after one year? When do you want to buy that house? When do you plan to retire?
You also have to remember that even though you are certain about your answers, the stock market is volatile and is never certain.
Tip number 3: Don’t be Emotional
Being a smart investor means you don’t let other things control you except logic. You always have to make logical decisions over the stocks you buy.
Generally, the prices of a company’s stocks are a direct reflection of investors’ sentiments toward that company. For instance, when a greater number of investors worry about the company, its stock price has the tendency to decline. When they feel that the company is doing great, its stock price tends to soar high.
Remember these words: bear and bull.
When an investor is a bear, or bearish, this means that he or she is pessimistic about the market. The optimistic one is considered a bull, or bullish.
The constant battle between bears and bulls in the market hours dictates, in a way, the ever-changing price of securities.
Rumors, speculations, and hopes rather than logic and systematic analysis drive these short-term movements.
You should not be swayed. Remember that when you buy a stock, you should carry with you good reasons. It goes without saying that your reason should be valid, and you should have an expectation of how the price will move in the market.
Mark a point at which you will liquidate (or convert to money) your holdings when your reason proves to be invalid.
In other words, you should also establish your exit strategy.
Tip number 4: Know Your Risk Tolerance
What is risk tolerance? Risk tolerance, in psychological terms, is defined as “the extent to which a person chooses to risk experiencing a less favorable outcome in pursuit of a more favorable outcome.”
In the market, your risk tolerance is how you feel about risking a hundred bucks for a chance to earn a thousand bucks in return. You risk losing your hundred if that means earning a thousand, if you’re lucky.
If you choose to refuse the chance, and settle for a smaller risk, then there’s nothing wrong with that, since there is generally no right balance.
Your perception of risk also affects your risk tolerance. Some investors may agree that one kind of stock is risky, but you may find it somehow safe. If it works for you, it’s okay. You can, in any case, try to learn which investments have high and low risks.
If you understand your risk tolerance, you can avoid making those investments that will likely make you feel anxious. In general, you should never keep an asset that disrupts your sleeping and eating habit.
In other words, any investment should not make you feel horrible.
Tip Number 5: Diversify
Stock diversification has been touted by many top investors in the world, including Warren Buffet.
One of the most important things to remember when it comes to diversification is that you should do all the necessary research to identify and quantify the risks of the stocks you have chosen to buy. You can lay comfortably once you have done this.
If you think about it, it is better to know the potential perils and risks of your chosen securities. Plus, diversifying reduces the risks you have to take in a way that you’ll have stocks that you can fall back on in case another crashes.
This may sound easy at first, but you should be warned that diversifying requires a lot of work and research. But it’s all worth it.
Investment in stocks has been proven by history to be a very rewarding experience, both financially and personally. If you have been searching for that one big opportunity to build your wealth, then investing in stocks is the most ideal path for you to take.
You have to know that in entering the investing world, you will inevitably invest time and energy too. And just like what has been said about this, it’s all worth it.
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