Stock market investing arouses two opposing feelings among the general public. Some hate stock trading and treat it like a game, while others love it fiercely. They probably think stock investing is some kind of lottery with a jackpot around the corner.
Both views are characterized by a herd mentality. If the stock market drops sharply, the enemies of the stock market say vehemently: Didn’t I tell you it was gambling?
On the contrary, if the market goes up for a fortnight, there is a sudden surge of buying all around.
But people can’t stay away from stock investing for long. The reason for this is that the returns from stock market investments are consistently much higher than those from fixed income deposits. Investing in stock markets provides the ultimate power to beat inflation.
The best way to derive income from your investment in the stock market is to evaluate your investment against returns over a specific period of time. The most common mistake investors make when buying stocks is not targeting specific performance levels. Furthermore, they do not assess the risks associated with investing in a particular security.
It should be understood that investing in the stock market generally cannot result in exceptional money gains. It has been found that the stock market tends to go up despite frequent declines and over time an investor can earn an average return of 15% to 20% per year on his investment.
It should be noted that an average return of 15% to 20% should not be taken lightly. Returns can be amazing when allowed to compound.
The second necessity is that you should use the stop loss principle.
However, if you want to earn 30% return in one year, you must set yourself a goal of rotating your investments three times a year and also set a goal of earning 10% on your portfolio at each rotation, that is say when you enter or exit the market.
In the same way, you should also set a stop loss limit. If you suffer a 10% loss on your investment, you should exit the stock. If you set similar limits on your losses, you avoid huge losses.
If you are new to stock market investing, it would be best if you first try to learn by trading on a fictional portfolio. Even if you don’t set a target on your profits, you should set your stop loss limits.
You need to learn how to structure your portfolio based on how often you need the income stream and return on capital. You must also determine the composition of your portfolio based on your age, your status in life, your sources of income and above all your risk appetite.
It is always advisable to follow the age-old wisdom of not putting all your eggs in one basket. In other words, you must learn to diversify your portfolio. It should also be noted that diversification should not be used for its own sake. According to Warren Buffet, broad diversification is only necessary when investors don’t understand what they are doing.
Your broker can remain your guide to investing in stocks and shares, but ultimately you should try to build your own trading or investing methodology. You must therefore learn to follow the evolution of the prices of your stocks rather than depending on the signals provided by your stockbroker. Remember, your own money is at stake.
The best principle in managing your stock investments, as discussed earlier, is to set and stick to buy and sell targets. It’s best to sell off your stock when you’ve reached your goal, even if its price seems to be skyrocketing. You don’t know when it can drop all of a sudden or even wipe out your lower targets. Set small goals, because they are not difficult to achieve.
Most investors lose in the stock market because of their greed and fear of losing. They keep waiting for the highest price and don’t sell. Similarly, investors are afraid to book a loss they have already incurred and are forced to sell at even greater losses.