Investing in the stock market involves more than simply buying shares of a company that is in the news at the moment and hoping for the best. Investors must focus on the following steps to maximize their chances of earning attractive returns on the capital they invest.
This is the first step that you should take when learning how to invest in the stock market because this will affect your choice of stocks, portfolio diversification, and profit-taking/stop-loss strategy.
If you have a 20-year time frame, then you can easily consider investing in stocks that move in sync with the cyclical upward or downward trends in the economy. For example, a 2-3 year down trend in the global economy may not hurt your profits if you plan to remain invested for 2-3 decades. However, you can end up with unprofitable investments if you have a 5-7 year time frame.
High risk tolerance does not mean you can gamble on penny stocks and treat stock market investments as a get-rich scheme. Risk tolerance depends on the risk-reward paradigm that matches your investment goals and financial limitations.
A low-risk strategy will focus on expensive blue-chip companies in defensive sectors where risk of severe depletion of value is very low. A high risk strategy can focus on inexpensive stocks that may offer very high returns along with the potential risk of high losses if the strategy doesn’t work.
The actual investment transaction should be the culmination of a long process involving detailed research of the domestic and foreign economic environment, the general trend in the stock market, and performance of stocks classified on the basis of sectors, themes, and market capitalization.
Get familiar with financial terms and concepts that help investors look beyond a stock’s price when assessing its value. An expensive stock that is valued at a forward Price/Earnings multiple that is significantly lower than the industry average can be cheap investment despite having a high price.
It is a myth that investors should buy the stock and forget all about it to enjoy maximum value appreciation and profits. Once you have set up your brokerage account and completed the formalities, it is time to deploy your funds in the market.
Invest in tranches and wait for the right buying opportunities to add positions. Review your investments to know when to average down your purchase price by buying more shares and when to cut your losses and exit the scrip. While you need not review your investments on a daily basis, you should conduct periodic reviews to ensure your profits are protected and losses are minimized.
Investing is a combination of art and science where hard data must be combined with experience to arrive at the right decisions. A smart investor is one who recognizes that investing is a process that requires constant fine tuning and learning to ensure protection of capital and maximization of profits.