Invest in Stocks – Strategy
Before investing your money in stocks, you must plan out your investment strategy based on the amount of money you want to invest. Also you should decide on how much time you want to invest and how much you can actually afford to lose. This is important because after all stock investing involves a fair amount of risk.
Keep the following points in mind before actually making your investments in stocks.
Maintain a diversified portfolio
The important thing to keep in mind is that you should never keep your eggs in one basket even though you feel that a particular company will do extremely well in the future. No matter how good a company’s performance and business model are, there are some external factors that come into play and which may affect its ratings. So instead of putting all your money in one stock, prepare a diversified portfolio. Most stocks can be classified as high-risk, medium-risk and low-risk investments. The rate of returns is the highest on the high-risk stocks and the lowest on the low-risk ones. You can plan your stock investment strategy based on the amount of money you have and the level of risk you are willing to take.
When to buy and sell Stocks
Study the market and analyze whether it is the ideal time to buy or sell a stock. All markets have their high and low periods. Ideally, you should buy stock at the end of a slump and sell at the end of a boom. This sounds simple but in actual practice, certain emotional factors come into play. It has been observed that during a boom phase, investors usually succumb to greed. Consequently, they end up buying when they should be selling to book profits. Also, during the bust phase, most investors are paralyzed by fear and in panic they end up selling when they should be actually holding fast to the stock. The result is that they rush headlong to book losses and get out of the market. Study the stock price movement charts to time your buying or selling and then decide if it is wise to change your investment strategy. You should not buy shares whose price is likely to fall in the near future. Similarly you should not sell if the price is likely to rise.
Decide the time period for your investments
If you are interested in low-risk stocks, you should aim at long-term gains and be prepared to hold your investment for at least three years. In other words, you should adopt a buy-and-hold strategy for a longer period of time.
If you are a medium risk-taker, you should invest in growth stocks and aim at a medium term period ranging from one year to three years. Also, you should practice a relatively aggressive investing strategy.
To reap maximum profits, invest in turnaround stocks and aim at short-term periods of about one year. These stocks involve a very aggressive investment strategy. Before buying the stock, go bargain hunting for the best price.
Select the right company
Keep in mind that all companies listed in the stock market may not be uniformly good. Pick a company for investment based on certain financial and non-financial factors such as the reputation of the management, future plans, consistency in past performance etc. Avoid buying on impulse based on rumors in the market. Chances are that undervalued stock will result in maximum growth in your portfolio. Also study the out of favor companies in the market for they may be selling their stock at a deep discount.
Decide on the right price of the stock
Once you have decided on the company, you must analyze whether its stock is attractive at the current trading price or it is undervalued or overpriced. Remember that the price does not depend so much on the asset base of a company as it does on its earning capacity. If the returns are attractive and growing, then the high price of the stock may be justified.