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Profit from the Stock Market

Updated on July 20, 2012

The Stock Market: How to Profit

Investing in the stock market successfully requires some level of skill and patience. However, you do not need to have all the technical skills in order for you to succeed. With a few fundamentals, you can always profit from the stock market, whether it is going up or down. Thus, for you to thrive in the complex world of stock market investing, you need to have a plan that guarantees actual growth from a substantial base of investments and decreases your exposure to risk. To do this you must:-

Understand your level of Risk Tolerance

The stock market is a very attractive place, especially with all the alluring promises of big returns on your money. But, before you can jump in and invest, you have to know and understand a couple of things about yourself. These are:-

  • Are you after low-risk, low-return investments?
  • Do you want low-risk, high-return investments?
  • Are you after high-risk, high-return investments?
  • Do you want to gamble away all your money, then hope and pray for a quick return?
  • When do you need your money back?

By asking yourself these simple questions, you will get to know what you are comfortable with, get control of your emotions and create goals about what you expect from your investments. In turn, you will be in a position to make sound and intelligent investment decisions.

Look for the Appropriate Broker

This should be someone who clearly understands your needs from the start and respects them. He should help you build a portfolio tailored towards meeting your goals and expectations that you set-up in step one. Ask a lot of questions before you can settle for a certain stock broker.

Create Your Portfolio

Deciding on what stocks to invest in is a very key step that you should do carefully. Stick to your goals and expectations and only include in your portfolio stocks that you are comfortable with. Furthermore, the returns from these stocks should meet your target. A successful portfolio, which guarantees profits in any market, should include three types of stocks namely:-

  • Dividend Stocks
  • International Stocks
  • Hyper-Growth Stocks

1. Dividend Stocks

Dividend is an amount of money you earn annually for owning stocks in a certain company, and it is paid out per shares held. Dividend stocks are the stocks that you get paid for owning them by the respective company you have invested in. They should comprise about 50% of your portfolio, since they provide stability and balance through all market conditions as they earn you passive income in form of annual dividends. When selecting what kind of dividend stocks to invest in, you should consider;

  • Stocks that have high and sustainable yields. The acceptable yields should be between 3% - 9%. Anything above that should be a cause for alarm.
  • Pay- out Ratio- This refers to the percentage of its net profit a company pays out as dividends. A company that has a pay-out ratio of between 50%- 75% is a good company to invest in since you will earn a healthy dividend on your stocks, and the company will have enough money left over to carry on its operations.
  • Invest in sectors and stocks that have great future growth prospects. This means that you do not rely too much on the past performance of a stock or sector because that does not necessarily guarantee how the stock or sector will perform in the future.

· Have a sell strategy at hand and stick to it. These are guidelines you set-up that act as a cushion about how much loss you can take-up before you sell a stock. The recommended mark is 15% but the decision on when to sell is always yours to make.

2. International Stocks

These stocks generate returns for you worldwide and should be 40% of your portfolio. They include investments in areas such as energy and commodities sectors. Examples are gas, oil, gold, silver, precious metals… to mention but a few.

3. Hyper- Growth Stocks

They are high risk, high return investments and should make up 10% of your portfolio. They are very risky to invest in, but their returns are massive and explosive. Some of these investments include; investments in direct emerging markets or newly traded public shares.

These simple fundamentals when combined, give you a 100% strategy which when properly followed, guarantees you profits no matter the market conditions.

Copyright Denis Mathenge 2012

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)

Develop value investing techniques with the help of one of the greatest investment teachers of all times; Benjamin Graham. With the help of financial journalist Jason Zweig, this revised edition is tailored to meet the needs of today's market while at the same time maintaining Graham's principles and showing their relevance today. The book is a great read.

 
Beating the Street
Beating the Street

Peter Lynch teaches you how to thoroughly research a company before investing in it. He shows you all the areas you need to evaluate a company on before you can purchase their stocks, and how to apply that knowledge in building a successful investment portfolio.

 

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    • denism profile image
      Author

      denism 5 years ago from Sweden

      There are a few reasons why people lose money in the stock market. First, it's the lack of a selling strategy as explained in my hub. Most people who don't have such a strategy are those who are so emotionally attached to their stocks. The cause of this is that they probably invested when the market was high, only concentrating on the short term quick returns on their investments and not paying close attention to the long-term performance of the company they have invested in. When the stock starts declining due to poor performance by the company, they are afraid to sell because they will lose more than they had anticipated. This happens due to a principal called compounding. Most people tend to forget that loses also compound over time the same way profits or income compound over time.

      Another major reason people lose money in the stock market is because of their lack of understanding of the stock market cycles. Before you invest in a certain stock or sector, you have to research how that sector has been performing over time. These are the Up- cycles and Down- cycles of the market. You learn when the market is at its peak and when it is at the beginning of a big swing. Most people invest when the market is already at its peak and that is where things start to go haywire. This is because as with anything that goes up, there comes a time it starts to go down. When the market is reaches its peak, it starts to go down fast and that's when the most money is lost because investors mistimed their investments. The best times to put your money down is during the beginning of a big swing. The market rises gradually and your returns compound over time and by the time it reaches the peak, you have a healthy return on your investment and you can now sell.

      A simple principal to follow is:-

      1. Buy low-this period people are afraid to buy because the stock market prices are low, but, it's the best time to enter the market.

      2. Hold- During this time the market is gradually picking up; the beginning of a big swing. You can apply the selling strategy just as a precaution to adjust any stocks that have not been doing so well to minimize losses and and protect profits.

      3. Sell- During the peak season. This is the time most people will now be entering the market when the stocks are already too high in prices and about to decline sharply. It's a good time for you to sell and get your returns that have accumulated over time.

    • dinkan53 profile image

      dinkan53 5 years ago from India

      Thank you very much!please publish also videos on your view of the market. Some of my friends doing stock market business are at minus totally, could you explain why people will be loosing their money in stock market? Rated as interesting.