The stock markets globally are known to be good money streams for those who understand the concept. Traders make a kill when they sniff an opportunity to buy low and sell high. However, there are risks involved as well. According to financial experts, there are three things to do for one to retire rich: Keeping debt at a minimum, living modest and within means and finally knowledge about investment
1. Buy low, sell high
It might sound very simple but investing is a crucial missing link in our financial lives. However, the concept of buying a cheap stock only makes sense if there are quick opportunities to dispose for an extra buck.
Stocks are quick moving commodities thus one is expected to think on the feet and analyse where there is an opportunity to capitalise and monetise.
Almost any long-term horizon stocks have proven to be beneficial investments that generally grind higher. Stocks of hot value can only stagnate or go lower for a short time before they spike up, in which case this would be the moment to grasp and hit the jackpot.
2. Don’t put all your eggs in one basket
If you cannot afford to buy more than one stock, use a mutual fund or Exchange Traded Fund. That way you own a sliver of lots of different companies rather than just one or two. It is actually a huge gamble to be overly ambitious with stocks because they could somewhat disappoint.
All stocks being traded have their strengths at a given time and so vary in returns. The market needs dictate the trading so that based on current trends, only the furious and ambitious stock gets noticed. If one therefore throws in all monies in one product, they could lose out. Spreading the catch is advisable and makes economic sense in the long term.
3. Think long term
Attempting to buy or sell shares based on a quarterly earnings report or an economic data point is a game for automated trading platforms not the average commoner.
Better opportunities come when a stock or sector is dismissed by the market and languishes despite steady economic results that will produce a long stream of profits.
Transportation stocks like airlines and railroads have gone through long out-of-favour stretches, only to churn out considerable gains when economic conditions and industry dynamics align.
4. Familiarity with filings
While some investors might think they have a sixth sense for finding good companies, the rest of us have to do our homework. There is no better starting point than the regular filings public companies make which are required to detail everything from company finances to potential conflicts and risk factors.
Most of the information usually ranges from quarterly and annual financial numbers to descriptions of business lines and management commentary on growth opportunities and costs. Regulatory filings will also detail any senior management changes, acquisitions, and stock transactions by executives or board members.
5. There is no perfect metric
Professional and amateur investors alike have their favourite measures of growth and value, from price-earnings ratios to dividend yields and profit margins. But there is no single number that divides good stocks from bad ones.
A stock that looks cheap at 10 times earnings can go to five times in a flash, and a flashy tech start-up that looks pricey at three time sales can easily jump to six in a heartbeat.
It is all in lucky gambling and it is important in this trade to understand there are wins and losses. Indeed what one earns is sometimes purely driven by market unpredictability.
6. Know what you need, and what your are paying for
The evolving brokerage industry is a hive of competition to offer the latest and greatest trading options, but for most investors the basic essentials can be found virtually anywhere.
Make sure you know the type of buy or sell order you are entering. A market order, for instance, will be executed as soon as possible, whatever the prevailing market price, a limit order by contrast will only complete the transaction within price parameters you have established.
Knowledge all-round is essential when entering the world of stocks so that one can know precisely how to handle expectations.
7. Choice of loaner or owner
When it comes to investing, while it may seem there are dozens of options, there are really only two. You can either be a loaner or an owner. A loaner is someone who allows others to borrow their money in exchange for interest.
An owner, on the other hand, invests in somebody else’s business with the hope that their ownership interest grows in value. If you put money in the bank, or in any kind of bonds, you are a loaner. You are investing in debt. If you invest in the stock market or real estate you are an owner.
You are investing in equity. Over decades, loaner investments like government bonds have paid a little less than the inflation rate while Owner investments, like stocks, have paid a lot more, beating inflation by a few percentage points.
8. Stock is not expensive and stock is not cheap
The price of a single share is not the right number to evaluate when deciding if a stock is a good buy or not. While triple-digit price tags might cost too much for a new investor with limited funds, loading up on 100 $1 stocks is not necessarily a better strategy.
Think of investing like grocery shopping – there is a reason you go to the store with a list instead of just deciding what to buy based on price tags.
9. Take market “News” with a whole shaker of salt
For instance, the first trading day of 2016 had no shortage of headlines, from a plummeting Chinese stock market to GM’s investment in Uber rival Lyft and the severing of relations between Saudi Arabia and Iran.
But is that any reason for US stocks to plunge more than 2.5 per cent (as they did before bouncing off their lows)? As an investor, the news flow driving day-to-day gyrations in the market should be taken as interesting reading rather than a reason to make or change strategy.
10. Taxes could bite off your profits
Giant firms like Amazon, Netflix and Google had superb runs in the year 2015 with strong returns averaging 34 per cent to 134 per cent. However, from a tax perspective, any investor who put in money like last year and eyeing exits wants them to keep climbing.
The one year mark is usually the tax collection body demarcation period. If one opts to sell stocks held for under a year, it triggers a short- term capital gain taxed as ordinary income. This could ultimately mean stepping back 25 to 39 per cent. Holding a little longer onto the same stocks for another year, will see a tax rate drop for up to 15 per cent in most brackets.