The desire to make a quick buck throws a lot of investors into the stock market. While the year 2017 could be a great year to start making money on the stock market, new investors will soon find out that it isn’t easy. Here are tips to help you invest and earn high returns in the stock market.
Establish Long-term Goals
Before spending your monies o n the stock market, it’s important to determine the reason for venturing into the market. Are you saving for future college expenses, hoping to build an estate, or do you need the returns in a year or longer? Investors who require returns a year or so should consider venturing in a different investment. The stock market is pretty volatile and provides no certainty of returns in short periods. Additionally, investors should decide the amount of capital they will require at a certain point in the future so as to calculate the present value of the initial amount and the required return. The growth of a portfolio depends on:
- The initial capital invested
- The net annual earnings on your capital
- The period of the investment
Avoid the Crowd Mindset
A typical investor’s decisions are often influenced by the actions of other investors, acquaintances and friends. As such, if everyone else is buying an individual stock, he is likely to follow, which is an approach that gets his hands burnt in the long run. Investing in stock markets isn’t about buying the most attractive stock but putting your money in a business you understand. It requires doing lots of research to know the company’s highs and lows before purchasing the stock. This way, an investor holds the stock longer even when the prices plummet below his initial investment.
Plan for Frightening Times
The volatility of the stock prices causes investors to make hasty decisions, leading to the classic investing gaffe of selling low after buying high. To avoid this, be sure to write down the reasons for holding every stock in your portfolio and the circumstances that would cause you to sell it. Journalize the strengths of the stock, expected returns and potential pitfalls that would be real game-changers. Here investors should factor in fundamental changes (like the loss of a major client, changes in the management or emergence of a strong competitor) that affect the long-term growth of the business, but not just any short-term fluctuation in the price of the stock.
Don’t Time the Market
The majority of investors time the market, leading to massive losses of investments. Successful investors purchase stocks and expect rewards via dividends or share price appreciation over the years or decades. It also means taking time before buying a stock. Here are some buying strategies that minimise an investor’s exposure to changes in the price of a share:
- Make a dollar-cost average by investing a particular amount at regular intervals such as once a week or month. The amount purchases more shares when the stock prices drop and fewer shares when the prices increase to smoothen out the average price paid. Some online brokerage markets such as CMC markets create an automated investing schedule for their investors.
- Buying a basket of stocks eliminates the pressure of deciding the best company to invest in. Having a stake in all the major players means that you can use the profits from one winner to offset the losses. It also allows you to identify the best company so that you can increase your returns.
Don’t Overlook the Fundamentals
New investors are hasty to make a killing from the stock market. As such, they buy shares without looking at the company’s basics like its product or service in the market and future growth prospects. The investors are also allured into tentative expansion plans and optimistic speeches that are often biased to short-term price surges. Investors should instead look at companies that have delivered consistent growth in earnings and boast good corporate governance.
Naturally, an investor keeps a constant eye on the performance of his stock. The trend, however, leads to overreacting to short-term changes and focusing one the share price instead of the value of the company. Sometimes the price of a stock responds to market changes often out of its control. Financial experts advise finding out if the change is long-term or short-term. Short-term causes rarely affect the performance of a good stock in the long-term. It’s the investor’s reaction to the temporary price fluctuations that matter.