Investing in Stocks
Stock Market Risks: Is My Money Really Worth It?
investing in stock market
Saving your money in a bank doesn’t entice you, seeing it offer too little growth potential. You turn to the stock market.
Some first time stock investors think that they should invest all of their savings. To determine how much money you should invest, you must first determine how much you actually can afford to invest, and what your financial goals are.
First, let’s take a look at how much money you can currently afford to invest in stocks. What were your savings originally for?
It is important to keep three to six months of living expenses in a readily accessible savings account – don’t invest that money! If you are employed, you will continue to receive an income, and you can plan to use a portion of that income to build your stock investment portfolio over time.
Golden rules to follow include never borrow money to invest in the stock market, and never use money that you have not set aside for investing!
Needless to say, investing in stocks is a risky business. For example, you must guard against investing in “hot stocks“. True, some get wealthy in investing in “hot” stocks such as the “dot-com” bubble in the 1990s, but when the initial buzz around these stocks begin to slide, so does your investment. This includes your money and others like you who invested in these stocks. To avoid such risks, you must diversify your portfolio. In that way, if one stock gets down, another one of your stock might be up and will help you recover some of your losses.
Stock Market Investing: Knowing When (and when not) to Sell
One of the greatest challenges of investing in stocks is developing a “sell discipline”. Some of the most adept investors struggle with the decision of when to sell.
First, recognize that there are no absolute formulas to tell us to sell at precisely the right time. If you’ll need cash soon, for whatever reason, you should be more ready to sell, especially if a stock becomes less of a sure thing. Similarly, if the economy is weak, we might be more motivated to take profits (or even losses) in stocks which are sensitive to economic swings, while a strong economy might allow us to hold tight.
Most important, however, is the intrinsic value of the stock itself. A simple rule plays out here: buy when a stock is under-valued (when the stock sells for less than its intrinsic value), and sell when it is over-valued (priced above intrinsic value). For a pure value stock, we should sell somewhere in that range, but if the company is expected to grow, we can wait longer and take advantage of that growth. Perhaps, as a rule of thumb, wait until the stock reaches a price double what we think it’s worth. Market Trends. It is our firm position that market trends alone should never lead to buying or selling a stock. However, if we’ve already decided to sell, trend indicators, used carefully, can enhance profits. For example, if a stock is in a solid uptrend that shows no signs of slowing, it may be profitable to wait for the stock to approach a short-term top before selling. Better to sell early than late. Don’t avoid selling because you’re emotionally attached to a stock. Circumstances change over time. Don’t sell when panicked. Don’t sell when worried. In many ways, worry is similar to panic, if a bit milder. Don’t sell when bored. In the end, every selling decision is a personal one, and must balance out all the factors we’ve mentioned.
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