Today, bank savings accounts offer trivial interest rates. Putting your money in the bank is safe but the money does not grow. The stock market normally offers substantial returns. Nevertheless, because of the risks associated with the market, most people avoid it. Worse still, majority of people enter the stock market at the top but later sell out at the bottom.
In the stock market, every rule has an exception. However, some principles are extremely tough to dispute. To be successful in the stock market, you must have effective strategies. With the right strategies, you will be able to approach this market with a long-term view.
The following are some rules you should play by in order to be successful in the stock market. With these guidelines, you will be able to navigate the market as well as build a vast stock portfolio in the long-term.
Never chase a “hot tip”
Regardless if the tip is from your neighbor, brother, cousin or broker you should never accept it as law. It is very important to know your reasons for making an investment. Conduct an extensive research. Thoroughly analyze any company you want to invest in. Relying on tidbit information from other sources rather than your own research is gambling to say the least.
Sure, with some bit of luck, a tip can sometimes pan out. However, tips can rarely make one an informed and successful investor. To success in the stock market trade in the long term, find exactly what you ought to pay attention to. Always listen to the markets and ignore its pundits.
Diversify, diversify, and diversify
When trading in the stock market, it is always prudent to invest in a variety of stocks. Spread your risks in several stocks in different markets, mutual funds, instruments, and bonds. The rule of thumb is that no single stock or investment should exceed 10% of your total portfolio.
To be on the safe side, invest in an array of different emerging markets and geographic areas such as US, Africa, Asia, and Europe. Diversify into hedge funds, commodity funds, and property funds. This usually cushions you against a cave in any one sector.
Avoid overemphasizing the P/E ratio
Most investors usually place too much importance on price-earnings ratio (P/E ratio). Relying on this ratio only to make sell or buy decisions is ill advised and dangerous. This is because it is one of the major tools among many.
You should interpret the P/E ratio within a context. Moreover, you should use it together with a variety of other analytical processes. Therefore, a low P/E does not necessarily mean that a certain security is undervalued. A high P/E ratio on the other hand does not mean that is necessarily overvalued. Simply put, you need to understand the ratio when trading your stocks.
Did you know that the most part of the overall growth in many portfolios emanates from reinvested dividends compared to appreciation of stock prices? For instance, a yield of 3% might appear very small. However, with time, it makes such a huge difference. Always, choose investments with a rich dividend history. Use these dividends as the concrete or ballast in your ship.
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