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6 Things to Know Before Investing in Stocks

6 Things to Know Before Investing in Stocks

Did you know that investing in the stock markets brings back an average return of seven percent each year after inflation? Well, stock investment is a long-term project that could beat inflation and give handsome returns. However, just like any other business, stock investment has its fair share of challenges.

Knowing well what you want in the stock market and understanding the stock market’s intrigues before investing is vital in your decision and success even during uncertain economic times. You only need to understand a few basics of the stock market and you will be up there, minting unbelievable returns. If you don’t do your comprehensive homework, you could also end up losing everything you have invested. Here are a few tips to help you with making bold decisions when it comes to stock investments.

Know What Goes Around in the Stock Market Corridors

Do you ever have conversations with friends and end up discussing how lucrative the stock market is? In your casual talks, as you catch up over some finely brewed beer, a friend convinces you how the stock market helps investors make big money. Maybe you were hearing the stock investment term for the first time and were convinced that it’s a money minting investment. You decide to throw your net into the water.

Depending on the information you have and how meticulously you execute your plans, it could work out for you. However, if the investment is to keep you in fashion with your friends, then you are in for a rude shock. Maybe you could go through the and learn a few basics before you roll your sleeves. More importantly, ensure you invest according to your financial goals.

Stock Market Is All About Strategies

There are numerous stories of influential investors and businessmen who made their fortune out of stock trading. Their stories may persuade you to believe that the stock market is just some money minting machine which can turn you into an instant millionaire. Nothing could be further from the truth. While it’s true several investors have made millions from investing in the stock market, there have also been those who have failed miserably.

It would be best to understand that those who are successful in the stock market’s field had excellent market knowledge and made some smart choices. Stock investment also requires discipline and well-laid strategies. And don’t you ever forget, there is a good number, as well, of those who have lost their entire wealth and were forced to sell their assets to cover for the losses.

Stock Investment Is Risky, More So in the Short Term

We may all argue that investing in stock over the long term is a safe investment strategy; however, even that isn’t guaranteed. The stock market is unpredictable and can swing in the most unexpected ways. It even gets riskier if you are looking for a short-term investment. Every year, the stock market experiences dramatic highs and lows, making it difficult to make short term stock investments.

Don’t Put All Your Eggs in One Basket

The surest way to reduce risks is by spreading your investments. Don’t just invest in one company; spread your investments and projects in different companies. If one company plunges into liquidation, you will have somewhere else to turn for comfort. The only disadvantage here is the substantial additional brokerage fee involved.

Avoid Leverage

The worst mistake you could ever make is to borrow money to finance your stock market investment. And that is what we mean by leverage—where banks and brokerage firms lend you money to buy stocks.

What happens when the stock market goes down? You will lose all the gains made and end up paying for the borrowed money. The idea to leverage isn’t bad, but it is a reserve for a more experienced lot in the stock investment market.

Prioritize Diversification

Putting all your money in one stock can be disastrous. At least, buy stocks from different portfolios to avoid losing money if a few stocks do not perform. However, do not over diversify. Just go for a manageable number that can make you enough profits without straining much.

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by Harvey Carr // Harvey Carr is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.