Did you know that what attracts investors to the stock market? Well, the answer is simple. Big money lures investors into the lap of stock markets. However, making money in the stock market is not a piece of cake. It takes a great deal of patience, discipline, prudent research, and in-depth understanding of the stock market. A profitable outcome is not a result of just luck. It is an outcome of the persistent application of worthy stock market principles that have been deduced from the experiences of millions of stock market investors through countless stock market cycles.
People take this path in the hope of earning quick and easy money. However, investing in stock market is much more complex than winning a lottery ticket one fine morning. Even though there is no sure shot formula to a successful stock market investment, the application of the following stock market golden rules will definitely increase your chances of earning a good return.
Take an informed decision
Before investing your hard-earned money in the stock market, you must undertake proper research on the stocks you want to purchase. Don’t just make an investment based on a company’s name, fame and industry type. This is not the right way to invest your money in the stock market.
Avoid “Follow the herd” mentality
It has been seen that more than often an investor’s buying decision is strongly influenced by the actions taken by his friends, relatives, acquaintances or neighbors. It is noticed that if everybody around is investing in a particular stock, then the potential customers are more likely to invest in the same stock. This strategy usually backfires in the long run. Hence you must always avoid “Follow the herd” mentality in order to avoid losing your hard earned money.
Start investments in smaller amounts
As a beginner, it is advisable that you go a little slow and start investments in smaller amounts. At this point, you may be a prudent decision maker, but you still lack real-life stock market experience. You must build experience before committing to a big stock market investment. Stick to the stocks that you have studied and analyzed. Buy them only in single digit numbers say 2 stocks or 3 stocks. Ensure that you don’t spend more than 8 to 10 percent of your monthly net savings in stocks right at the beginning. You must test the waters before you make a sail.
Keep a risk threshold
As a beginner, it is only practical to keep a risk threshold. In the stock trading world, it is termed as “Stop-Loss.” However, expert investors don’t need to apply the stop-loss concept to their investments. As a beginner, you should set a stop loss limit. For example, if you set a stop loss of 10%, and the stock price falls by 10%, the stocks are sold. As a beginner, you need Stop Loss as protection.
Avoid external advice
When you are making the crucial decision of investing in stocks and deciding which ones are best for your investment you must either rely on your extensive research or hire a sound financial advisor. Do not invest in the stock market purely based on what is being said by the media. Do not rely on an external, and unprofessional stock advice because that only leads to superficial research work. Your investment decision must be based on your own financial goals and ground research.
Don’t let emotions cloud your judgment
A lot of investors have lost a lot of money in the stock market as a result of their incapability to control emotions, particularly greed and fear. In a bull market, it is very easy to get lured by the greed of earning high returns in a short time frame hence, a number of investors led by greed invest heavily in the stock market without really putting much effort towards understanding the associated risk. More than often instead of creating wealth these investors led by emotions burn their fingers badly the minute the stock market sentiment reverses. In a bear market, investor usually panic and sell their stock for unbelievable rock bottom prices. Hence you should not let your emotions cloud your judgment. If you let that happen, you are bound to make a bad investment decision.
Invest your surplus funds
If you are a beginner in the stock market, you would not like to burn a hole in your pocket. When you choose to invest your money in a volatile market like the stock market, then you must ensure that you invest only the surplus funds that you can afford to lose in case you hit the worst-case scenario. It is advisable that you don’t invest a sum that if lost can get you into a financially sticky position. It is not necessary that you make a loss. You may earn a great return on your investment. However, nothing is really guaranteed. Hence it is prudent to avoid a financial crisis by only investing your flush of surplus funds.
The safest investment strategy is to put your eggs in different baskets. Prudent investors invest in stocks of different companies, mapping to different industries and different countries. Portfolio diversification is done in order to ensure that no single bad event can impact all your holdings at the same time or at least impact them to different degrees. Portfolio diversification allows you to recover losses on your total investment. It is the best investment strategy to manage, reduce and diversify risk.
Monitor your investment rigorously
Your effort should not stop at just investing your hard-earned money in the stock market. It should extend to rigorous monitoring of your portfolio. You must persistently educate yourself about the stock market trends and look out for how market changes impact your holdings. Only if you monitor your investments rigorously, you will be able to tune your portfolio to match the changing market trends and minimize your risk of a potential loss. A hawk watch of your investment portfolio is absolutely imperative if you want to grow as an investor in the stock market.
Making an investment in the stock market is an excellent opportunity to build wealth. However, it only works for those who are willing to exhibit perseverance and willing to make an investment in energy and time to build experience. The younger you begin your stock market investment endeavor the finer are the results. Remember to learn to walk before you start running. These beginner-friendly tips will help you successfully kick start your investing career and create a wealth generating channel.