Deciding to invest in the stock market can be an exciting proposition and if you do it right, there are plenty of rewards to reap. I hope this brief article will get you started in the right direction. control
Before you begin, learn this Golden rule of Investing, by heart and always adhere to it.
Make no financial decisions when you are emotional.
Depending on the how much time and money you can spend, we present two simple investment strategies for you to choose. In either case, remember to cover your risk by using the principles of risk management in the last section. It is important to make money in the stock market, but it is also very important to save your money in the stock market by spreading your risk.
Invest in a growing sector via Index fund
Not everyone has the time or patience to study potential companies in detail to make a sound investment decision. You can avoid the extra work and invest in an Index fund in a growing sector, with a low-cost provider. An Index fund tracks the movement of a specific sector or stocks. Trackers give investors the return of the Index minus the charges, so pick a low-cost provider.
The biggest mistake beginner investors make is to buy big quantities of shares when the stocks are in their high or sell it off at a hint of a correction. Do not be in a hurry to make money in the stock market; it might only result in a loss.
Accumulate these stocks over time and avoid the frenzied selling that happens when negative news breaks. Remember there are bad days but also good days. If you are going to sell it, better to do it in a good day!
Invest in a company in a growing sector
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,”
If you love to get into the nitty gritty of a company’s financials, you will prefer this approach. So what should you look for in the financials that suggest future growth potential? Although there are hundreds of indicators, let us focus on the major ones. Look for a mid-cap company with low or no debt.
Check QoQ (quarter over quarter) and YoY (year over year) revenue steadiness and upward movement for 3 years. Check quarterly earnings per share. Another indicator is the price to earnings ratio (PE), the lower it is, better the valuation and a good buy.
Compare these indicators and especially PE ratio with other companies in the same sector. This will give you an idea if the stock is undervalued or overvalued. Buy the stock at an undervalued price and keep buying the stock over time. Review the indicators quarterly and you are set to make money in the long term.
Important: Do not put all your eggs in one basket
Divide your investment fund into 10 equal lots. If you are following Index fund strategy, you can invest two lots per sector(using Index funds). And if you are following the company specific investment, invest one lot in each company and you can invest in two companies per sector. Following this rule, your exposure is limited to 10% ( or 20%) at the most per company (or sector). In either case, you do not need to invest all your money in one shot.
Every month set aside some money to increase the size of your lots. This way you can invest in a company at different price points. Diversifying the sectors will help you minimise the risk of one sector failing in a particular season. Diversifying within the sector will help you from accidental shocks in one company’s price changes. This way you can risk proof your capital in two ways.
I hope using these simple strategies you start building your diversified portfolio and keep its value growing.