Investment in the stock market is one of the profitable, yet risky investments, but still hundreds of thousands of individuals invest in the stock market. Some people think that success in the stock market only depends on luck, but in reality, one can make successful and profitable investments if they use some basic principals. The key to being a successful investor in the stock market is the execution of your investment. This article covers some 10 tips and steps which are the key principles on how to invest in stocks. These are the simple principles which are the from the experience of the successful stock market investors.
Investment Principles to Invest in the Stock Market
A large number of individual investors, usually buy or sell the stocks in the market on their “gut feeling”. And sometimes, just sometimes, their feeling about security is right, but it does not work all the time or for everyone. Relying upon luck for investing in the stock market is not an investment strategy; instead, it is a desperate move. To pick the best stocks to invest your money you need to follow some basic principles, which can make put you among the top-level stock market investors.
1 Define and Set Financial Goals
The first and basic principle of any business or investment is to set long-term financial goals. To map out your goals before investing in the stock market, consider two things:
- Why are you investing your money in the stock market?
- When will you need your money back? In six months, a year, five years or longer?
Once you know the purpose of your investment you can clearly make your decision whether to invest in the stock market or not. If you need your money back in a short period of an investment or in a few years, then the stock market is not the right place for your investment. there is no certainty in the stock market because of the sudden changes in the stock prices. Therefore, sometimes not all the capital you have invested is available.
2 Understand Your Risk Tolerance
Risk tolerance is “the extent to which a person chooses to risk experiencing a less favorable outcome in the pursuit of a more favorable outcome.” the risk tolerance of each individual differs from the other. In other words, risk tolerance is when you risk your $100 to get $1000 or $1000 to get $10000. Risk tolerance is also defined by the level of anxiety one may experience in the presence of a risk. It is, therefore, necessary to understand the level of your risk tolerance to avoid any investment which might lead to an anxious outcome. At the times of stock market uncertainty, investors need to be calm and relax to get the best possible outcomes.
The risk tolerance is influenced by the perception and knowledge about the stock market. The more knowledge and experience you gain about the price fluctuation in the stock market, the more the chances of risk reduces and you can buy or sell the best stock to invest in.
3 Diversify Your Investments
Many of the new investors think that it is better to place all their money in a single company because it is safe to “put all your eggs in one basket and watch the basket”. But this does not work in the stock market. The sudden changes in the stock market can result in a greater risk if you have invested your capital in one single company. To manage the risk in the stock market, experts have recommended diversifying the investment. It means instead of putting all your money in one place, invest in different companies. It is because the bad event or unfortunate circumstances will not affect the investment or holdings in all the companies at the same time. In other words, diversification helps you to recover your maximum loss from your total investment.
4 Avoid Leverage
Leverage means using borrowed money to buy corporate security. Leverage is usually given by brokerage firms, banks at half of the purchase price. It affects the price movement of your stock as well as your return. In the case of leverage, you have to give 50% of your profits along with the interest to the brokerage firm or bank. But if you have invested 100% of your money you could earn a 100% return.
5 Invest in the Business You Understand
Another strategy or principle on how to invest in the stock market is to invest in a business of which you have knowledge and understanding. When you understand the business of a company the chances of losses are reduced and you can better invest your money. Before investing in the stocks of a company first know its business.
6 Avoid the herd mentality
Do not follow the crowd. It is not necessary to invest in the same stocks which your acquaintances, family or friends are buying.
7 Take informed decision
Do research about the stock market trends and which company has the best stocks to invest in.
8 Control your emotions
Keep yourself calm and relax at the time of making the investment. Don’t rush.
9 Create a broad portfolio
This could be achieved by diversification of investment.
10 Only invest your surplus funds
Never invest all your money. As there is no certainty in the stock market it is not wise to put all your money in the stocks. It increases the risk of loss up to a greater extent.