Stocks can be a great investment with the market returning a historical average eight percent return. Too many would-be investors make mistakes going into the market and instead of earning profits on their trade, they end up losing their initial capital. Before you invest in the markets, there are four things you should know before placing that order to buy.
The first thing you need to know about investing in the market doesn’t have anything to do with PE ratios, capitalization or any other fancy investing terms. The first thing you need to know is about yourself. All investments carry an element of risk. Usually the higher the risk, the higher the expected return. As an investor, you need to be comfortable with a level of risk you are willing to accept. If you are a very risk-adverse investor, then other types of investments may be more suited to you than the stock market. Or if you still want to invest in stocks, you should stay with the safer “blue-chip” stocks. Blue chip stocks are historically stable and pay a regular dividend.
Secondly, as an investor, you need to understand the market and the companies you invest in. You don’t have to become an expert, but you do need to understand the basics of market mechanics, the history of the companies you invest in terms of stock price trends, profitability, consumer demand, etc. Playing the stock market without knowing the basics is like playing baseball without knowing the rules.
A third thing you need to know before investing is what are your goals. Just knowing you want to “make a fortune” isn’t good enough. Specific goals should be set at the onset of your investing career. Take into consideration things like the preservation of capital, rate of return and loss limits. In fact, each trade you make should adhere to the investing rule of plan your trade, trade your plan.
Emotions figure high when it comes to money, making it, but especially losing it. It is easy to get caught up in the soaring euphoria of seeing a trade take off. The fourth thing to know is to take your emotions out of the equation. If you have planned your trades well, you know at what price point you’re going to invest, and you know how much you are willing to loss, and what is the target profit on a trade. Knowing all this in advance will help you remain objective about a trade.