Important tips to become a successful stock investor

12 August 2012 06:30 pm

The thought of investing in the stock market may seem a little frightening at first, especially for those who have never done so. Wading into any uncharted territory is scary, but armed with knowledge and guidance, the stock market is not so difficult to navigate and shares should form an integral part of any investment portfolio.

In fact, shares have been shown to be the best long-term investment, surpassing property, cash and fixed interest as a generator of wealth. The key to becoming a successful stock market investor is to obtain a comprehensive understanding about investing in the stock market. Stock market investor should be aware of the following points.

•     Investing in the stock market on “too much credit” is not going to help you to reap the benefits of your investment.
•     Successful investors are highly disciplined, consistent and rational. Highly effective people will do what needs to be done even if they aren’t in the mood.
•     Some investors place too much focus on past performance. Investors usually think that the past performance is a good indicator of future performance but ignoring the fact that best performers can also turn into the losers over a period of time. Past performance is no guarantee of future returns.
•     Don’t focus only on return and don’t be overconfident.
•     One of the most common mistakes that beginners make is forgetting about expenses or not budgeting enough for certain costs.
•     Understand where you have made errors in the past so as to avoid making the same mistakes. Some fail to learn from mistakes.
•     Monitor the market news and stay up to date on the current events/developments. Not only country’s economic situation and policies, the world events such as political unrest, crime, changes in oil and energy prices can have a direct impact on the prices of stocks. Don’t get all your information from a single source! There are so many different sources of advice, from the stock broker, television, radios and newspapers to websites. You should search for reliable stock market news sources to keep you informed of what is going on in the market.
•     Don’t follow rumours without doing your own research and analysis.
•     Some investors don’t have the patience for potential investment growth. Many investors make the big mistakes of selling a valuable stock too quickly.

•     Successful investor analyzes stocks by comparing various reports and charts. Using technical analysis and stock charts can give you a better picture of the effect of buying and selling on stock price.  Some investors place too much focus on Number-Based Analysis. Numbers can be used to identify strengths and weaknesses, or to compare various investment alternatives, but numbers alone are not enough in determining an appropriate investing strategy.
•     Diversify beyond the stock market. Invest a certain portion of your portfolio in other types like Unit Trusts, bonds, treasury securities, gold, etc. This diversification helps to maximize your return, while reducing your risk since you are spreading your investments over different types of asset classes. So even if one investment fails, the other investment in your portfolio will balance out the loss. Don’t put all your eggs in one basket.
•     Buy stocks from several different industries. Such action can protect you from industry risk, whereby all companies in a certain industry experience a major downturn.
•     Don’t put all your money in one type of investment. If you have all your money tied up in a single investment and something goes wrong, you will lose all your money.
•     Every investor is different and what’s good for one isn’t necessarily good for another. You must develop an effective strategy that works for you.
•     Some investors don’t follow the financial plan. A number of investors simply invest money on other areas without following the initial plan and this may yield higher risks of losing the money.
•     Set aside some money to ensure you remain financially secure. If you do not have enough funds and you ever get into financial trouble, then you may end up selling all your stocks for less than the purchase price and make a loss. Therefore, make sure you set aside some money in a reserve fund in case there is an emergency. By doing so, you can protect yourself from losing money and maximize your returns in the long run.
•     You should never invest huge amount of money all at once. It would be wiser to put in the money at various times.
•     A successful investor has a lot of patience, common sense and the willingness to research, practice and build up a portfolio that will provide a high enough return to meet personal investment goals.
•     One of the biggest investing mistakes that many people make is investing before they are financially ready. To be a successful investor, you should clear up your debts first before using those funds for investment purpose.
•     A successful trader has a strong desire to succeed. A strong determination to succeed can be the one factor that makes all the difference.
•     A good trading plan is one of the secrets to having the confidence to trade in the stock market. Your trading plan must be realistic and includes all the details such as which markets you will trade, how much profit you want to achieve, and which strategies you will follow.

Being well prepared is a secret of success that many people miss out on. It is very important to create a successful trading strategy before any investments have been made.

•     Be aware of the risks and returns associated with your investment.
•     Reduce risk through diversification. Invest in different types of stocks instead of buying only one company’s stock.
•     Don’t diversify too much. Though portfolio diversification can reduce investment risk, spreading your investment over too many companies will also lead to some problems, you will have too many to properly manage.
•     Do some research beforehand. If you don’t have a good understanding about a particular company, then you shouldn’t risk your money on it. It is always better to do some research and get advice from those who are already investing in the share market. Good stock selection can maximize your investment returns.
•     Successful investor employs appropriate investment strategies and techniques. Don’t use any trading strategy that you don’t fully understand.
•     Avoid blindly following trends. Following market fads may cause you to purchase an overvalued stock. When everyone starts talking about a particular stock, you are probably too late.
•     Investing should not be emotional. Find ways to keep your emotions out of buy and sell decisions, and stick to your plan. Don’t let your emotions rule your decisions.
•     Don’t be afraid of taking losses. Successful investor takes losses in his stride and tries to understand why the market moved against him.
•     Don’t be greedy. This is the most common mistake associated with trading stocks. Don’t be in a hurry to make quick money.
•     You should note that inactive stocks contain more risks. Inactive securities are fairly illiquid and trade in very small volume.
•     It’s good to have confidence in the ability of your stock broker, but remember the final decision is taken by you.  
•     Don’t Overtrade! This is a very serious problem and you should learn to avoid it.
•     A successful investor/trader should calculate the risk-reward ratio of a particular trade and try to minimize their risk exposure.
•     Only invest with money that you won’t need in the short-term and can live without for a while.

“An investment in knowledge pays the best interest.” - Benjamin Franklin
When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions.
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