Golden Rules of Stock Market Investing

Golden Rules of Stock Market Investing

The appeal of big money has always thrown investors into the lap of stock markets. However, making money in equities is not easy. It not only requires loads of patience and discipline, but also a great deal of research and a sound understanding of the market, among others. Added to this is the fact that stock market volatility in the last few years has left investors in a state of confusion. They are in a dilemma whether to invest, hold or sell in such a scenario.

Although no sure-shot formula has yet been discovered for success in stock markets, here are some golden rules which, if followed carefully, may increase your chances of getting a good return.

Avoid the Herd Mentality

The typical buyer’s decision is usually heavily influenced by the actions of his acquaintances, neighbors or relatives. Thus, if everybody around is investing in a particular stock, investors will likely do the same. But this strategy is bound to backfire in the long run. No need to say that you should always avoid having the herd mentality if you don’t want to lose your hard-earned money in stock markets.

Take informed decision

Proper research should always take place first before investing in stocks but is rarely done. Investors usually go by the name of a company or the industry they belong to. This is, however, not the right way of putting one’s money into the stock market.

Invest in business you understand

Never invest in a stock, but invest in a business instead. Also, invest in a business you understand. In other words, before investing in a company, you should know what business the company is in.

Don’t try to time the market

One thing that even Warren Buffett doesn’t do is to try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares. A majority of investors, however, does just the opposite, something that financial planners have always warned to avoid, and thus lose their hard-earned money in the process.

Follow a disciplined investment approach

Historically, it is apparent that even great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull runs.

However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen making outstanding returns. Hence, it is wise to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.

BWorld Golden Rules of Stock Market Investing 2

Do not let emotions cloud your judgment

Many investors have been losing money in stock markets because they can’t control their emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to resist. Greed expands when investors hear stories of fabulous returns being made in the stock market in a short period of time.

Instead of creating wealth, these investors, thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to let those emotions guide you and cloud your judgment.

Create a broad portfolio

Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. The level of diversification depends on each investor’s risk-taking capacity.

Have realistic expectations

There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 percent returns during the great bull run of recent years. However, it doesn’t mean that you should always expect the same kind of return from the stock markets.

Invest only your surplus funds

If you want to take a risk in a volatile market like this, then see whether you have surplus funds which you can afford to lose. It is not necessary that you will lose money in the present scenario. Your investments can give you huge gains too in the months to come.

Monitor rigorously

We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Hence we need to constantly monitor our portfolio and keep affecting the desired changes in it. If you can’t review your portfolio due to time constraint or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that.

See Also: Launching into Stock Investing

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