Regardless of experience and amount of investment, investing in the stock market requires one to always remember the Ten Commandments for successful investing. Here we take a look at those golden guidelines which will also act as a quick intro as you learn how to play the stock market.
Commandment #1: Invest only what you can spare
The stock market is not exactly ideal for short-term financial gains. Stocks take longer to return substantial profits and only result in either no gains, or losses in the short-term framework. So essentially the first rule to stick to would be to invest only with money that you can spare. Do not invest your backup savings or any sort of money that’s tied up to some sort of expense in the near future. As a rule of the thumb invest only if you’re completely confident that you won’t need the money for at least another 18 months.
Commandment #2: Limit your investments to escape the market fluctuation
Buying shares or selling them can be done in two ways – one simple way is to use the market order by which you will simply buy the share for the market rate. The other way is to purchase them using a limit order. By using the limit order you set the maximum amount you’re ready to pay for a stock and the minimum amount for which you’re ready to sell the same. By this way, you can ensure you don’t end up buying a stock at the higher end of its average value. Though setting the limit order needs a bit of experience, for beginners a safe limit would .5 or 1% below the current market price.
Commandment #3: Choose individual stocks over mutual funds and indexes
However reliable mutual funds may sound, the simple fact that they yield only meagre returns positively indicates they are not the best option for beginners. The reason mutual funds are so hard to profit from is the high fee and the charter associated with them. Simply put, instead of paying a hefty price to top managers to maintain funds that are rarely going to return profits, it is better to put that money to better use elsewhere.
The index funds on the other hand present a different scenario. Instead of tracking a particular sector, the index tracks the entire market which includes the grand winners and sure shot losers as well. So instead of taking home a large profit from well performing stocks, you’re stuck paying up for the underperforming shares as well.
Commandment #4: Aim for long term investments
The stock market is much like a sophisticated gambling game, so taking risks is inevitable. But much like any game of chance, there is always a slower, much predictable route to gain profits in the stock market as well. It simply involves making investment plans for the long haul. Once you make an investment in a share, wait for it to gain a stable foothold before giving into the local market sentiments. So even if your shares face a severe dip, in the long run they are assured to catch up with the market making the long term strategy best for beginners.
Commandment #5: Premium companies are always the safe bet
Stocks of large, well established companies are always the best option regardless of the experience of the investor. The simple reason is that, the stock values of such companies rarely plummet to worrisome depths and they are always assured to survive for the long haul. And stocks of such companies will be thriving regardless of the term for which you set a plan for them. So for first timers, the obvious first choice should be the big names of the market.
Commandment #6: Split your purchases
Though it might be tempting to buy stocks all at once when they are at the lower side of the market average value, an expert advice would be split the purchase between 30-day intervals. The reason for the split-up is to ensure that the stocks have the potential to rebound and to prevent paying up a high price for a severely overvalued stock.
Commandment #7: Try not to listen to the media
As first time investors it can be easy to get manipulated, especially by the news media. Though staying updated isn’t a bad thing, too much of it can ruin your investment strategy. And shares hardly face drastic changes as the media might depict, especially in a short time frame. So if you made the investment, simply review the stock once a week or so, and sit back and relax, everything else will happen automatically.
Commandment #8: Only buy stocks that you can predict
Learning to invest in the share market is best done on familiar sectors. So if you’re someone who has no idea on how the energy sector works, it would be best to stay away from investing on shares pertaining to the sector. Instead focus on sectors and shares of companies that you understand to make more accurate predictions and smarter investments.
Commandment #9: Stay away from financial advisors if you’re beginner
Obtaining the advice of a financial advisor may be helpful if you’re planning on investing big or when you have sufficient wealth to invest on high risk stocks. But when you’re just starting up and looking to explore the share market safely, it might be best not to seek the advice of one. As you’ll only end up paying a huge fee for basic advice that you would have probably learnt yourself from good research.
Commandment #10: Learn to manage your portfolio better
Quite often, you will find that one of your stocks will outperform the rest of the shares in your portfolio by a large margin. And the higher value stock will contribute to almost half your portfolio’s total value overtime. But this varied distribution poses a threat too, as any drop in the higher value stock’s performance will affect the profits gained from your other shares. So the ideal thing to do here would be to sell the high performing stock and use the profits to augment low performance shares. This way you can ensure prolonged safe returns, but make sure you don’t change your portfolio too often to avoid missing out on the big returns.