Investing in stocks can turn you into a multi-millionaire or billionaire a la Warren Buffet. However, this will not happen overnight, nor will you always enter/exit trading positions at the right time (sell tops and buy bottoms). Here are four great tips on how to invest in stocks to get you started:
To be a successful stock investor, you must have basic financial knowledge. More specifically, you should learn how to read financial documents including a balance sheet, cash flow statements and profit and loss statements. Additionally, you must understand financial reporting standards and requirements as well as other related concepts such as stock splits, earnings conference calls, bullish and bearish markets, preferred stocks, hostile takeovers, macro and micro economic policies, talent-driven acquisitions among others. Without sound financial knowledge, you will be unable to pick the right stocks to trade, take advantage of looming acquisitions or minimize your portfolio’s risk profile.
One of the leading causes of failure among fledgling stock investors is having unrealistic expectations. Such traders usually try to beat the market to their own detriment. According to Michael Kitces, a partner and research director at Pinnacle Advisory Group, rarely do investors come out of bull and bear markets with better investment figures than index funds. Instead of setting unrealistic goals, you should create a diversified investment portfolio that contains a wide range of de-linked assets such as emerging markets stocks, bonds, precious metals, large cap stocks, midcap stocks, small cap stocks, and commodities.
Even the best investor in modern history, Warren Buffet, has suffered losses along the way. You, too, will likely face the same predicament irrespective of your knowledge of the stock investing industry. In other words, the difference between a profitable stock trader and an unprofitable one comes down to risk management. More specifically, profitable traders typically evaluate and quantify every conceivable risk before entering/exiting a trading position and this protects their portfolios from huge losses. To reduce your risk exposure, you must develop and implement a sound risk-management strategy.
Shun all schemes that promise a quick buck including the so-called fail-safe assets, get-rich-quick investments or supposedly lucrative trading opportunities. Such schemes are typically designed to steal from greedy and naïve investors. Instead, take the hedge fund industry’s investing approach: thoroughly study and dissect a publicly listed company’s finances, market niche, consumer demographics, competitors, product/service offerings, employee morale, innovation profile, brand visibility, and market share. This is arguably the best way to identify stocks that are likely to generate a positive ROI.
Stock investments are not the preserve of a few wealthy individuals or large hedge funds. You, too, can invest in the stock market successfully provided you are willing to learn as much as you can about stocks, set realistic trading goals, develop and implement viable risk management strategies and avoid get-rich-quick schemes.