Intelligence is a must in any endeavor; you don’t need superior IQ to make your investment a success. According to Peter Lynch who was a well-known portfolio investor from 1977 to 1990 (Magellan Fund), everyone has a brain that is capable enough to invest in stock market and act accordingly. He said that if a person can pass the 5th-grade math then you can be good enough to work your way in the stock market as well.
Tips to Invest in Stock Market
Everyone wants to get rich and happy in no time. It is in human nature to look for a way to a hidden treasure. Some people actually buy lottery tickets and also invest in stock market that quadruples by the end of the year. But this is a matter of luck and they both are not viable investment strategies.
In our quest for riches and success, we often tend to forget about the tools that we have in our hands: time and compound interest.
Investing consistently, avoiding needless financial risks, and allowing your money to work over several years, is a certain way to amass assets. Here are some important tips that you need to follow as a novice investor.
1. Set goals for long term
You need to find out why you need to invest in stock market in the first place. Do you want a cashback within six months or five years or any time longer than that? Are you saving for your retirement or to pay the college fees? Do you want to buy a house or looking to construct an estate for your beneficiaries?
Before investing you need to find the objective of your investment as well as the time when you want cash back. Stock markets are very volatile and there is no certainty that you will have your cash in time of need.
Based on how much you need and when you will need it will allow you to determine what type of investment you should go for to attain the desired result.
2. Understand risk tolerance
Risk tolerance is a psychological property and it varies from person to person. It is positively influenced by wealth, income and education and is negatively influenced by age. The ability to think about risk as an opportunity is your psychological trait and it varies from person to person. Would you risk $10 to earn $1000 or $500 to win $1000? The ability to take risks differs and there is no right balance associated with it.
The perception of risk is important in investment. With experience and knowledge, you are more likely to think that stock investments don’t bear as much risk as you initially thought when you made your first investment. Your anxiety when making an investment becomes less intense. Though the risk tolerance remains the same, your perception about risk evolves with time and experience.
3. Control your emotions
Your biggest obstacle to profits is your inability to control your emotions. This makes you take decisions that defy logic. In the short term, the prices indicate the collective emotions of the entire community of the stock market. When a good majority of the investors negatively perceive a company, its stock price will decline and when they are positive the price will appreciate.
If a person perceives negatively about the market then he is a “Bear” while the positive counterpart is called a “Bull”. The tug-of-war between the bears and the bulls results in the increase and decline of the prices.
A lay man’s investment decisions is driven by rumors, hopes, and speculations. These are emotions and they don’t represent logic.
4. Handle the technical first
Take your time to learn the basics and technical before making an investment. It is not actually a stock market but the market of stocks. Unless you are going for ETFs your primary focus should be on individual securities.
Even when the averages fall 100 points some securities will gain price. You need to know about the financial metrics and their definitions. You also need to know about the popular techniques to select stock, timing, order types and how to set stop loss and take profits.
5. Diversify your investment
For identification and quantification of risk, you need to diversify risks. Warren Buffet’s investment style advocates stock diversification and the concept of don’t put all your eggs in one basket.
On the other hand, Andrew Carnegie believed that the safest technique to invest is to put all your eggs in one basket and then protect the basket. But with that being said, don’t consider yourself Carnegie or Buffet particular in the first few years of investing.
Historically, equity returns have seen a significant amount of returns over time and they do well as compared to other types of investments. If you are willing to be a consistent saver, then you need to invest in the stock market. If you start young, you will achieve great results but learn to walk before you run.