Many people consider the stock market as a big casino, where stock prices move at random, or are regulated by some cartels, designed to separate gullible investors from their money. However, the reality is different for the informed and educated investor, who approaches the stock market with due diligence. Done right, trading in stocks is a good way to earn a second income.
Trading in stocks is not as tricky as you think. It is only when people blindly invest their money in some stock, without bothering to study about the stock or the state of the market that stock investing resembles gambling. Follow these tips to increase your chances of the stock exchange delivering a stable second income.
Research about the Stock
The basic rule for success in stock investing is to research about the stock. Consider the underlying fundamentals of the stock, such as the profitability of the business, the popularity of the brand, and other factors. However, do not go by the name of the company alone. Consider the movement of the stock prices as well. The stock price may be heavily overpriced for the brand value, and if the price is at its peak owing to some favourable developments, the price may actually come down in future, even when the company registers a profit. Ratios such as P/E Ratio, Book Value, Earnings per Share, and other metrics give an indication as to whether the price of a stock is in its fair value range, though there are no hard and fast definitions as to what is reasonable value.
Patience is the Key
Another cardinal rule for success in the stock exchange is patience, and resisting temptation. Stock markets are known for their volatility, and price can move defying all expectations. A patient investor removes unmoved by these price swings. They sit out an irrational price fall, owing to some unfavourable news, resisting the temptation to sell in a panic. They wait until the fundamentals of the stock gain ground again. However, at the same time, they are pragmatic, and know they cannot win every trade. They consider the time value and the opportunity cost of the money as far more important than emotional reasons to hold on to a stock. They are willing to book a loss if the situation so demands, such as if some unexpected events have changed the valuation of the stock, and there is no scope for recovery in the foreseeable future.
A cardinal mistake many gullible investors do is try and time the market. Such actions are akin to pure gambling as stock prices are unpredictable and outside anyone’s control. The idea behind investing in stock is to buy low and sell high. Many investors, going with the flow and hype, do exactly the opposite. It is only investors who make a systematic investment in the right stocks, and hold on to their investments patiently makes money on a sustained basis.
It is always a foolhardy and very risk to stake all the investment in a single stock, or even a few stocks. The best approach is to diversify the investment not just among stock, but among stocks of different industries, and even among asset classes. For instance, investing in four or five tech stocks is not diversification, as all these stocks may be influenced by the same external factors. Rather, invest in one or two tech stocks, and one or two manufacturing stocks, or anything else as appropriate. Apart from equities, also consider mutual funds, index funds, commodity funds, and forex as possible diversification options. It is also important not to spread the available too thin, to benefit from a big upswing.
Open an Account with a Reliable Broker
Although there is no sure-shot formula to stock market riches, insightful and informed buy and sell decisions pays rich dividends more often than not. Keeping track of all the developments may be too daunting for an individual investor, who has another full-time occupation. The best bet is to open an account with reliable brokers such as CMC Markets. Such brokers deploy professionally qualified insights and make stock recommendations after considering all predictable variables, aggregating insights from various sources. Opt for brokers who offer internet trading, making it easy to buy and sell stocks from the convenience of your home.