What You Should Know Before Investing in Stocks
Stocks have always been right at the top when it comes to choosing good performers among different investment avenues. Historic statistics show that those who have steadily invested in stocks have been better off than those investing in bonds, mutual funds and other investment options.
But stock market investing is also fraught with risk, especially when it is difficult to predict how the market will move. To invest successfully in stocks, it is important for you keep some basic rules in mind.
Never Invest for The Short Term
To an outsider it may appear that it is possible to make incredible gains by investing in stocks for very short periods. In fact, day traders do make a killing in the market when they know exactly how to time purchases and where to invest.
But such investors have the advantage of a complete understanding of all market factors that affect stock prices. For new investors, stocks yield a good return only when they are willing to wait for a reasonable period.
Buying fundamentally strong stocks with a basic understanding of market movements and letting them grow is by far the best strategy for a beginner. Use a common sense approach to determine segments that have perpetual demand and invest in stocks in such segments, for example: infrastructure, pharmaceuticals, banking etc.
Never Allow Greed to Dictate Purchase or Sale
Get rich quick schemes rarely work with stocks. Invest in stocks that are steadily if slowly gaining ground in the market. Avoid those that suddenly shoot up to dizzying prizes even if friends and self proclaimed experts consider these ‘sure bets’. Remember that the stock can hit rock bottom just as speedily leaving you with no time to pull out of the investment when signs of a price fall first begin to appear.
Understand the Risk-Return Relationship
One of the most important things to know before stock investing is that high return means high risk. So if you see a stock that is giving extraordinary returns but seems to have no apparent downsides, then chances are the risks have simply not yet made an appearance.
Pairing high risk- high return stocks with low risk- low return investments is a good way to achieve a reasonable return with enough caution built into your portfolio to prevent a wipe out. However, to have the correct level of diversification you should be aware of the various risk levels of different investments including stocks of various kinds, bonds, mutual funds and others.
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