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Highlights
- Equities are one of the best asset classes to invest in due to a number of reasons.
- Costs involved in investing add up to a significant chunk of money over the long run, impacting the net returns.
- Managing their risk helps the rich to be saved from a few catastrophic losses.
Wealth creation, for the most part, is about investing in assets which could generate a decent return over a long period of time. Irrespective of the asset class in question – be it stocks, bonds, commodities, real estate or even complex derivatives products – the goal remains the same, i.e., those assets have to appreciate in value over time to fetch you profits.
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Equities are probably the best asset class out there for an average investor for various reasons such as strong regulatory oversight for frauds and scams, requirement of low investment amounts, very high liquidity, etc. However, most often, individuals find it difficult to approach stock markets from the perspective of a smart investor and most of them end up being gamblers, losing a major chunk of their money (if not all). We have compiled a brief list for you to understand how the rich or astute investors invest in the stock market.
Read More: What makes penny stocks so risky?
- They take into account all investing costs
Costs related to investing are often one of the most ignored aspects of investment, especially among new investors. Costs such as brokerage, taxes, penalty charges, etc., are important to factor in if you want your investment decisions to be sensible.
Keen on knowing investing secrets of the rich? Here they are
While investing in a mutual fund, investors also have to pay a management fee, while for hedge funds, performance fee also comes into the picture. All these costs add up to a significant chunk of money over the long run, impacting the net returns.
- They know their competence
One of the primary reasons why the doyen of investing world, Warren Buffett, is so successful is because he is well aware of his own competence. Sticking to his niche has made him buy only those businesses which he understands. This trait has played a major role in making him what he is today.
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One may argue that he might have missed a few new-age internet-based businesses such as Netflix, Amazon, Facebook etc. but even without those missed opportunities, he is sitting pretty in the US$100 billion club.
- They know they can be wrong
Most retail investors lose money in the stock market because they try to hit the home run on every move. This is not how stock markets should be approached. The rich know investing is a game of probabilities and of certainties; hence they play accordingly.
Knowing they could go wrong helps them to manage their risk which ultimately saves them from a few catastrophic losses, which catch small investors completely off guard, derailing them off their investing journey. Diversification is one of the ways the rich use to manage their risk.
Read More: Tempted to invest in penny stocks? Here are few timing tips
Bottom Lime
Small or new investors form a lion’s share of the market participants who lose majority of money while smart investors (most of the time) end up with a decent wealth in the stock market (without a crystal ball). So, what do they do differently?
Much to retail investors’ surprise, it’s not as important to hold the hottest stocks as it is to manage your risk. Also, keeping your cost of transactions low, staying within your niche even if means to let go of a few opportunities, could work wonders for you as they do for the rich, mostly.
Read More: 5 tips to recognise ‘pump and dump’ schemes
