With the high rise in inflation rates, your salary may not suffice all your needs. You can invest your money in real estate, mutual funds, fixed deposit schemes, and many others for good returns. The most attractive and appealing area of investment currently is the stock market investment.
It is a place filled with opportunities and massive potential profits. However, it is a risky investment, even for financial experts. Your success in this market mainly relies on the strategies you use. Read on for five golden rules you can adopt to smoothen your new stock market experience:
1. Avoid Tips and Rumors
When you are involved in the stock market, you are bound to come across market tips and rumors from many sources. Your colleagues and friends may also provide you with buying and selling tips. Some of these may help you, but the majority are just rumors. You may also apply the appropriate tips at the wrong time since the market is continually changing. The following are the common stock market rumors you are likely to encounter:
- Sale of Unit: It is a rumor that an organization sells its stake and leaves its shareholders with a high share value
- Corporate Governance: The news that a promoter is involved in the mismanagement of company funds lowers stock prices
- Plans for Raising Funds: Any news about a company raising funds pushes the prices up
- Other rumors you may encounter are pledging and delisting of shares. You can always monitor the prices by looking at the stock analyst ratings. This way, you can make better, informed choices
2. Invest Only What You Are Willing to Lose
As mentioned earlier, stock market investment is a risky venture. Therefore, it is normal to be overly cautious when starting. You should avoid using up all your savings since you are not safe from losing everything. Before you decide to invest in the stock market, consider the financial hardships you may go through if you lost your entire stock.
A big mistake that you should avoid making is using a loan as an investment. With the risks that are involved, you may find it challenging to pay back the money. Small investments are cheaper and allow you to be more flexible. If you are a small business owner, you can protect your business by investing some of your profits in the stock market.
3. Monitor Your Investments
Unlike fixed deposits, you cannot invest in the stock market once and forget about it. It is volatile, and the prices frequently change along with the organization. Below are five ways to keep track of your stocks:
- Keep up with the market trends by checking in to financial news sites
- Set up a free portfolio tracker with sites like Google Finance and Yahoo Finance
- If your portfolio tracker offers automatic alerts, sign up to receive emails or text messages about changes in your stocks
- Read the annual report, which is an appreciable research tool for stock investors
- If you are involved in individual stocks, check-in with each of the company’s quarterly earnings calls
4. Invest in Companies You Know and Understand
With the risk involved in stock investment, you should have enough information about the company you want to invest in. If you are passionate about cars and often purchase automotive magazines, you can choose a company from the automotive industry. When deciding on where to invest, you can consider the following about your options:
- Financial health as shown by annual and quarterly financial reports
- An organized and easy to understand the business model
- Willingness to pay dividends
It is one of the oldest strategies you can use in stock market investment. Investing in a single company is too risky, just like you should never put all your eggs in one basket. There comes a time when a company does not perform well hence decreasing the value of your investment.
It is safer for you to have a combined investment of small, mid, and large-cap stocks. Small and mid-caps have higher chances of growing your investment and returns, but there are risks involved. Large-cap stocks are mainly stable with good returns. Beginners should always start with small and mid-cap stocks depending on how much they intend to invest.
The five rules above are a big step towards stock market investment for beginners. Investors who stay focused and avoid rumors experience massive opportunities from this market.