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Read this before you start your stock investments
Here are the 8 points to look out for when making your own stock investments.
1. Have a solid comprehension of basic economic principals.
Before you get started, you should understand basic principals and laws of economics. The stock market closely follows the law of supply and demand. For example, when there is a large demand for the stock of a certain company, the cost of its stock will increase along with the demand. However, if there are more stock available for sale than there are buyers, the unit price of that company stock will decrease. This is why an undervalued stock can remain undervalued for a long time if there is no demand for the stock.
2. Learn about prospective companies you want to invest in.
Do your homework before you invest in prospective companies. Read the company annual report, find out about their products, operations, services and basic business track record and understand the management. If possible, use the product that the company sells, or visit the shopping mall that the company owns. This information gives you an idea of how reliable their product is, how stable the company is and whether they can deliver on their promise to offer profits to investors.
3. Select companies with staying power.
There are so many companies that exist in today's stock market, selecting becomes a major decision for beginning investors. Relatively stable companies and business are owned by the government, unless there is a political revolution or crisis going on.
Oil companies and telecommunications companies are usually profitable and stable because there is a constant demand for their services and products.
While IT companies are rapidly growing in today's stock market, there are so many of them it may be a challenge to check their profiles to exercise reasonable care before investing. In my view, innovation is the key to an IT company's sucess. If the company stop innovating their products or services, most likely they will not do well in the long run. Before putting your money into an IT company, verify their track record and make sure they are stable and profitable for a minimum of 10 years.
In the environment of high oil price, avoid companies which has a high reliance on energy. And also avoid companies whose cost make up a high weightage in energy. Profitability of such companies will suffer as high oil price eats into their margins. Such examples are airlines companies and chemical companies.
4. Keep an eye on the news.
Guesswork is completely ineffective when it comes to investing in the stock market, always remember investment is not a gamble. Good intuition and solid decision-making come from learning about global and local news both politically and economically. Read newspaper daily and try to read as much business magazines as possible. When you watch the news, make sure to keep track of the industry your company is in. Analyses how is the news going to affect the stocks that you are investing in. Even stable companies may go bankrupt or have a major blow that will bring them down.
5. Never put all your eggs in one basket.
Avoid investing in just one company and spread out your stock investments to several businesses and several sectors. When you have stock concentrated in just one company, you have a greater chance of losing it all. When you spread out your investments over several companies, those earning profits can cushion the ones that not not as profitable.
6. Stockbrokers can be your stock advisors but you have the final say.
A stock broker is actually gambling with your money so you need to do your own homework. Dishonest brokers can take advantage of investors who do not fully comprehend how the stock market works. Remember broker earns their income through commission, so they will always encourage you to trade more, irregularless the stock is good or bad. But the interest of the investor, which is yourself, is to make money from your stock investment.
7. Greed is your enemy.
While everyone is eager to make profits in the stock market, an investor loses their sense of reason when they are fueled by greed. A money hungry investor may forget to check on economic rumors and spontaneously decide to sell or buy with the thought of making major profits and then lose it all. Avoid "hot" stocks and sectors, value usually comes from stocks that are not widely covered by analysts or stock brokers.
8. Avoid companies that are suffering losses and carries high debt/equity ratio
Most of the time share price rises when their earnings are growing. But if the earnings are not growing, the investor may still receive some dividends while waiting for the share price to rise. But if the company is suffering losses, you can forget about dividends. It will be worst if the company carries high debt level at the same time. If the company is unable to repay its debt, the company can declare bankrupt, and share price may go down to zero.
Putting your money in the stock market can of course be risky, but hope that the above tips can help invest in the right direction.
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