If you're looking for good investment options then now is a good time to enter the stock market. Despite the political noise, the stock market is growing at a steady rate thanks to a stable economy.
There's also the fact that entering the stock market is a lot easier than other investment options. Unlike real estate, for example, investing in stocks doesn't require large amounts of capital, nor does it involve substantial amounts of risk.
Moreover, the stock market also offers plenty of safe investing options, such as mutual funds, exchange traded funds and other similar instruments. Later, when you become more financially literate, you can try more high-risk, high reward options, like short selling, futures and various high risk funds.
As far as stocks go, there are plenty of opportunities for ordinary investors to choose from. So if you're interested in the stock market then here's what you should know.
What Does It Take to Start Investing in the Stock Market?
There are three things that you will need in order to start investing in the stock market. These include:
- An Investment/Portfolio Strategy
- Knowledge About the Stock Market
- Emotional Control
Your portfolio strategy will dictate how much of your capital/savings you should invest in stocks and how much should be invested in other items, such as real estate, bonds, futures and mutual funds for example.
Since we're concerned about stocks, your strategy should outline how you enter and leave each position in the stock market. Some strategies dictate that investors should only invest in stocks that grow by more than 10% per year, while other strategies require investors to look at company earnings, balance sheets and dividends.
How you choose or develop your investment strategy will dictate how much returns you can expect from each investment. So look at successful investors, and try to follow what they're doing. For example, Warren Buffet's more recent trading and investment strategies reportedly yield 25% to 30% returns. Other investors average higher using riskier strategies, but there are also safer options, though they offer fewer rewards. It's your call. Just remember that no successful investor ever entered the stock market without a strategy.
Next, you will need to develop your knowledge about the stock market. This process is divided into two parts:
- The Technicals
- The Fundamentals
"Technicals" refer to general trends of a particular stock's price. Is it going up or is it going down? Technical analysis uses stock charts to determine how high or how low a particular stock's price will go within a particular period of time. This information allow investors to determine the best time to buy and/or sell their stocks.
As for the "Fundamentals", this information is used to analyze the value of a particular stock. Take note that we used the term value instead of price here, and that's because some stocks are over-valued, while others are under-valued.
Fundamentals refer to those factors that determine a stock's value, regardless of its current price. For example, a company that has tripled its earnings in the last quarter but has stocks which are cheaper than those of its rivals could be called under-valued, since their stock's price does not match the actual performance of the company.
Likewise, if a company's stock price is around $100, but has lost money for the past few years, then its stocks may be over-valued, in which case, it has "bad fundamentals" since the stock's price doesn't match the company's actual performance. Mastering both the technicals as well as the fundamentals will allow you to pick winning stocks that offer good returns on investment.
Finally, you will need emotional control if you want to invest in stocks. What this means is that you never deviate from your investment strategy, and you never allow greed or fear to influence your decisions. It also means focusing on the facts alone, and never allowing a sudden spike or fall in prices influence your decision, unless such events are built into the actual strategy.
If you can master these three things then you will be able to invest in the share market without any trouble.
When it comes to investing, it's important to keep in mind that there's no such thing as a winning formula. Being a good investor is as much a product of experience and discipline as information, strategy and training.
Investing in stocks starts with a broker, but they will only execute your trades. They cannot teach you how to choose the right investments, nor can they help you develop, test or perfect your investment strategy.
You will need financial experts and communities to teach you these things. The good news is that the internet is full of such options, from blogs to newsletters to videos. So before you put any of your money into the stock market, be sure to consult these sources first, so that you'll get the best returns for all your investments.