A good investing decision should be based on many criteria because the expected performance of a stock depends on the quality of the company, the market evaluation of its stock, and the macroeconomic environment of the company and the general market. However, sometimes it is not easy to make the right choice taking into consideration all the data. Luckily, using fundamental, technical, and timing analyses together can ensure successful investing.
Investing in the stock market is one of the most profitable and riskiest kinds of investments. Nowadays, in most cases, investment allocation is a result of flowing cash to the assets where the current return and risk are satisfied with a certain investor expectation.
There are some differences between such participants in the stock market as investors and traders. However, a classical investor and trader both aim at gaining money.
History evidences the different cases, when an investor started with a small amount of money and eventually became very rich, or on the contrary when a millionaire lost all investments on the stock market and became poor.
What is the most important quality that separates the winners from the losers in the stock market? The answer is simple – it is knowledge in investing, either that is based on collective wisdom from other investors or gained through making own mistakes. Anyway, the following basic principles could be useful to remember:
- Never invest all your money in the stock market, especially, if you are a beginner. A commonly recommended portion of the invested money in stocks is from 25% to 50% of your total budget.
- Never invest all your money in one stock – always diversify among several stocks in different sectors.
- Always watch closely general market conditions, especially, when a bear market is about to start. Be prepared by selling most holdings in advance.
- Never rush with investment solutions. Carefully watch financial quarterly reports, news, and macroeconomic trends before making any decision.
- Never let your emotions prevail over a rational disciplined approach.
- To improve the return/risk ratio, use reliable software tools that embody the investors’ concentrated wisdom.
- All stocks are volatile without exception. There will be always a certain probability that something suddenly will go wrong with any stock. Even the best stocks can depreciate.
For the last decades, the expectation of most investors decreased from about 30% to about 10% of annual return on investment. Most investors prefer long-term type of investments with less than five transactions per year.
Not everyone is able to succeed in investing. Most losses in investing happen because of a lack of knowledge, over-confidence, impatience, greed, fear, and different delusions. An experienced investor knows that there is a direct proportion between time spent to increase investing skills and return on investment.
Self-education can help to improve investment skills. Usually, after reading tens of books about investing, investors come to conclusion about the importance of fundamental analysis and interpretation of technical analysis indicators.
Also, investors need to read quarterly financial reports, watch market conditions, try to predict macroeconomic trends, etc. How much time does all this take? Fortunately, there is an optimized approach that allows investing time effectively to give a maximum return.
As an example, to reach excellence in driving it is enough to read one book, get driving training, and regularly practice. Something similar is possible with investing skills, except that a few books will be required. The following books could be good for improving investment competence:
- Lessons from the Greatest Stock Traders of All Time by John Boik (good introduction to investing)
- Stock Investing For Dummies by Paul Mladjenovic (a very useful and important-to-read book)
ABOUT THE AUTHOR: Alex Shmatov, PhD