Investing your money is perhaps the most straightforward path to wealth creation. With investments, you put your money to work, you unlock value for multiple streams of income, and you get a chance to make money even in your sleep. Investing in the stock market is a particularly smart way to put your money work because you’ll be entitled to income in form of dividends while the value of your investments increases as the price of your stocks increase.
Unfortunately, many new stock investors often lose their money because they lack reliable information on how to start investing. Some investors lose money because they trust the wrong people to give them hot stock picks. Others lose money in the stock market because they allow their emotions to get in the way of logical reasoning. This piece provides insight into three tips that can help you improve your odds of success as an investor in the stock market.
Let winners run and cut losers short
When you invest in the stock market, you’ll inevitably have a mix of winning stocks and losing stocks. All investors experience their fair share of losses, the key to profitable investing is to have more winners than losers.
Now, when you buy a stock and the stock starts enjoying bullish tailwinds, your self-preservation instincts will want you to take your gains off the table. Many investors will be content to sell their winners as soon as the value of the investment doubles or triples. However, if your technical and fundamental analysis suggests that the bullish ride is valid, it might be in your best interests to continue riding the winning trend.
However, if you unwittingly buy a stock that turns out to be a loser, it might be foolish to keep on holding the stock in the hopes that it will rebound after an extended period of losses.
For instance, BlackBerry Limited crashed from a $128 high in 2009 all the way down to $11 in 2013. Many investors are still holding on to the hopes of a rebound, but the stock has been stuck in an $11 to $13 range for much of the last four years.
Make time your ally when buying stocks
Many new stock investors confuse an “understanding of the times” with “art of timing”. Timing the markets might be useful for traders who are conscious of windows before the opening and closing bell, windows during the earnings season, and windows before or after a big announcement. However, for an investor, an attempt to time the market is usually an exercise in futility.
Dollar-cost averaging is a strategy through which you can make time your ally in your stock investment activities. With dollar-cost averaging, you’ll use a predetermined amount of money to buy shares at regular intervals – weekly, monthly, or quarterly. The predetermined amount will buy varying number of shares at different times as the share price fluctuates. Hence, you’ll find it much easier to invest in the stock market without being unnecessarily worried about whether the share price is too high or too low.
Ignore the market hype, focus on a company and its business
When you buy the stock of a company, you are essentially buying ownership (a stake) in the company. Stock investing is fundamentally different from stock trading – traders love short-term noise, eye-catching headlines, volatility, and marketing hype.
As an investor, you should be more concerned about understanding the underlying business of the company. You should strive to understand how the business makes money, it's standing in relation to competitors, legislative risks in its industry, and its long-term prospects in the grand scheme of things.
New investors will also do well to only invest in the stock of businesses that they understand. You have no business investing in Tesla if you don’t understand electric vehicles, their prospects, and how EVs are likely to stack against gas-guzzling cars with internal combustion engines.