- Personal Finance
Low Risk Stock Investing: Tips to maximize returns on your stock investments
The temptation to make big money has always thrown financiers into the lap of stock market. It has been proved that owning stocks is one of the most profitable and easiest ways to grow your finances over the long-term. However, investing in stocks is not get-rich-quick scheme. It will take work and there would be a learning curve too.
With stock market falling and rising, beginners are sure to be frozen with fear. Here are few tips to get the most out of their savings by investing in stock market:
Stocks represent ownership – Behave like an owner
When you are investing in stocks, you are taking an ownership of the company. So don’t act like it is just a flippant purchase that comes with no responsibility. Investing in stock market should involve analysis and research along the same lines as owning a business. Keep yourself updated on financial statements along with the competitive market.
Be prepared to hold stocks for long time
Often short-term profits entice newbies in stock market. But adopting long-term prospect and dismissing “just go and make a killing” is a must in stock investment.
Benjamin Graham, the father of value investing said: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
His message is simple and clear: Stocks in short-term are determined by changing emotions of the participants while in the long run, what matters is a company’s actual underlying performance.
Use market fluctuations to your advantage
Without being much concerned about market fluctuations, an intelligent investor would instead try to take advantage of such fluctuations. Fluctuations open up an opportunity to buy wisely when prices drop and sell when they advance a good deal.
The principle behind this is simple: stock market and individual stocks have always bounced back and forth, over and over again. Buy stocks at low price and sell at a higher price – It’s that simple.
Diversification is the key
Diversification is simply a fancy term for the advice: Do not put all your eggs in the same basket.
Many people commit the mistake to assume that buying 5 or 10 stocks is equivalent to having a diversified portfolio. However, that’s not the case. If you are buying 10 stocks in all tech related fields, it’s not diversification.
Remember that the goal of diversification is not to ensure gains or guarantee against any sort of loss. But, it would provide the potential to improve returns for the targeted risk that you take.
Make it a habit to invest regularly
If you are thinking that you don’t have enough money to invest, you are mistaken. Most people commit mistake of buying stocks only occasionally when there are big windfalls like tax refund.
Don’t invest in a lump sum quantity and wait for it to grow. With the availability of automatic investments options, one can put even the modest amount of savings in stocks on a regular basis, regardless of market conditions.
Sometimes people borrow from others to get maximum profits. However, beginners in stock investment should avoid leveraged investing and focus on old-fashioned way of building wealth – by saving money over time.
If leverage can multiply your profits in short time, it can do the same in reverse as well, trapping you in an unsteady downward spiral of losses, which could further lead to not only financial but mental stress as well.
Leverage is simply a tool that you can use once you get the confidence and experience in stock market.
Use Limit orders to sell and buy stocks
In stock market, there is an option to buy via a ‘Market Order’ or ‘Limit Order’. With Market Order, you pay for a stock according to the current going rate, while Limit Order allows you set highest/lowest price you are willing to pay for a stock, eliminating the guessing game of stock market.
For beginners, limit order is good to start with, since it offers more safety, control and discipline over your investments and you buy stocks at the price you want. However, it wouldn’t guarantee execution. In case stock never reaches order price, nothing would happen.
Investing in stocks is no rocket science and provides a great opportunity to build a large asset value. There is no formula to multiply your finances; it will take time, dedication, effort and patience. Use this guide to take control of your finances and utilize the power of stock market to generate wealth for years to come.