Who doesn’t want to be rich? In a world where we come across rags to riches stories of people who made it big by striking gold in the stock market, it is easy to be misled into believing that it is the easiest and sure shot way to get rich. At the same time, we come across equal horror stories where people have lost their entire life savings gambling in the stock market. This makes us believe that it is pointless and too risky to invest in stocks.
While both scenarios exist in equal measures, there are steps that you can take as an investor to minimize the losses and maximize the gains. Like a lot of things, it takes a systematic approach to invest in stocks. It is important to understand what you’re getting into because, despite all the risks, stock markets have historically given great returns.
It may not be ‘easy’ to invest in stocks, but it sure is simple. Read on to know more.
Remember the 3 principles of smart investing
To smartly invest in stocks, imbibe the following traits and follow them religiously:
1.Analyze the long-term evolution and management principles of the company
A thorough analysis of the company’s history and management is key to unlocking their future potential. Just because a company is not doing well now is no reason why it can’t turn things around in the future, provided it has a solid framework for doing business, and top class leadership. Don’t just randomly invest in stocks, instead study them first.
2. Protect your investments by diversifying them
Once you’ve studied the companies and decided where to invest, choose a handful of companies to invest in. That way, even if one company fails to give positive returns, your money is safe because the other investments will pay off. Don’t put all your eggs in one basket
3. Prioritize safe and steady returns over crazy profits
You’re an investor, not a day trader. You aren’t looking to make millions in a month but instead, want returns over a long period. An intelligent investor never looks for crazy profits but instead focuses on safe and steady returns and does proper hedging. Safe might be boring, but in the world of investing, it pays off to be boring.
Don’t trust the stock market blindly
The stock market is not always driven by logic and rationale. Sentiments affect the numbers every day. There may be times when people are really upbeat about the economy and the stock market also reflects the same. Optimism is a good thing but there is a moment when optimism becomes euphoric in nature and leads to a bubble-like situation. The price of stocks increases beyond their intrinsic value and people are willing to pay more and more and eventually, the price comes crashing down because it exceeded the intrinsic value.
Similarly, there will be times when people are really pessimistic about the economy and the stock market crashes, prices go down. It is important to weather this storm because it is just a temporary phase. The market will restore to normalcy after some time.
So just because the prices are increasing and people are buying stocks like crazy doesn’t mean that you should do the same. In fact, sell when people are buying(price is high) and buy when people are selling(price is low)
Stick to a formula while you invest in stocks.
Image credit: Mint2save
A strict formula helps to remove you from the emotional stress of investing in the market. One of the easiest ways to do this is to set aside a fixed amount every month to invest, regardless of the price of stocks that you’ve chosen to invest in. This is also known as rupee cost averaging
This ensures that you’ll buy more when the price is low, and buy less when the price is high. This helps control impulsive buying of stocks as well and could help prevent incidents like investing a big sum right before a crash.
Don’t let sentiments get the better of you. If you have to invest in stocks, learn to be calculative and not get carried away by daily volatility. It will pay off.
So as you can see, this article wasn’t about stock recommendations. We merely talked about the mindset required to invest and make no mistake, these tips will go a long way in providing safe returns while you invest in stocks. You can thank us later as you sip Margaritas in your retirement home.