The lure of earning huge money has always attracted investors to the stock markets. However, making money in equities is very difficult and requires a lot of patience and discipline along with intense research and an understanding of the stock market. The volatility in the stock market in the last few years has put the investors under a dilemma whether to invest, hold or sell.
- Take informed decision: The investor should perform in-depth research over the security in which he/she intends to invest rather than going by the name of a company or the industry they belong to.
- Avoid the herd mentality: Usually, an investor looks over the investment of his acquaintances, neighbours or relatives and gets influenced by them. Although in the short run the strategy may work, it is bound to fail in the long run. According to the world’s greatest investor Warren Buffett, the investor should be cautious when others are greedy, and be greedy when others are cautious in order to succeed.
- Invest in a business you understand: Rather than investing in a stock, a person should invest in the business that he understands. In simple words, a person should know what business the company is in before investing in it.
- Don’t try to time the market: One should not try to time the stock market and should not go against the financial planners as it might result in losing money.
- Follow a disciplined investment approach: Despite the great bull runs in the stock market, many investors have lost their money due to volatility. However, if the investor invests his money at the right place following a disciplined investment approach, he might achieve an outstanding return in the future.
- Set aside your emotions: People usually feels that if the stock has generated negative yield, it will reverse back and will recover the loss, generating a positive return. People do this without doing any fundamental, technical or economic research about the market trend. If the market is in up-trend or bullish, people don’t see the trend and exit the market before the stock could outperform and similarly if the market is in down-trend or bearish, people stay invested in the stock and sell their shares at rock-bottom prices.
- Create a mixed portfolio: Creating a mixed portfolio helps the investor to increase the returns along with the reduction of risk.
- Have realistic expectations: A person should have a realistic approach to calculate the intrinsic value of the stock and determine the target price. There are many stocks that have generated more than 50% returns during the bull run in the market, but it is not always the same.
- Invest only your surplus funds: A person should take the risk on his surplus funds which he/she can afford to lose. Although profit is the reward for risk-taking, it is not necessary that you always will lose money.
- Monitor rigorously: One should monitor his/her investment at regular intervals and should make changes if it requires.
Although there is no sure-shot formula for being a successful investor, these golden rules may increase the chances of generating better returns.
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