The Essencial Skills of the Stock Investor
The world of investing is full of opportunities but also of perils. What might simply be a decision of investing in a company may have large implications for the networth of an investor. What, for example, if a company goes bankrupt from one day to the next? How are investors going to get their money back.
That is why it is important to understand the different options available when making stock investments. It is necessary to be cautious but also look for places that will provide a better reward for your investments in the long run. There are, however, a few ideas that can help investors to make the best out of their money.
One of the main ideas known by professional investors and little understood by other people is the concept of diversification. When investing your money in companies that may lose value quickly, the best strategy is to avoid putting all your money in a single place. When you have at least five different investments, all you can lose with a single stock is 20%. This is true even if one of your stocks loses all its value.
Diversification has another advantage: you have a bigger opportunity of having winners. With ten investments, for example, there is a higher probability of one of them having a huge return over a period of one year.
Of course, being right about a stock and making a huge return is good, and that's why many people don't practice diversification. However, the problem is that we are more frequently wrong than right. It is better to make a lower total return overall than losing everything in a bad bet.
Cut Your Losses
The other concept that is of huge importance is to cut losses as quickly as possible. One of the main problem of investors is that they get attached to companies. They try to keep an investment going on even when it is clearly not working. If that is the case, you need to cut your losses as soon as possible. If you really like a stock, you can always buy it back when it is going up again. Or you can even buy the same stock at a lower price later.
If you regularly practice cutting down your losses and diversification, you will develop a good sense of what is working in the market. This regular practice you put you in a position to make much more sound decisions as an investors in the stock market.
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