As in any type of investment, investing in the stock market requires knowing a number of basic rules before you take your first investment steps.
The “Bankrate” website published a report outlining the “main” steps for beginners in the world of investment and speculation in the stock market. Here are the most important of these steps:
1- Diversify your investment portfolio:
Diversification in general is the basis of any successful investment, whether it is in the stock exchange or others.
As they say “don’t put all your eggs in one basket” because in the event of a sharp drop in stock prices and a severe crisis or a severe blow to the financial markets, you may lose a large part of your capital.
In order to ensure a good diversification of your portfolio, you must follow several criteria:
First, by industry. It is important to invest in different sectors. In the event that one of these sectors malfunctions, the losses will be compensated by the other sectors.
Second: Diversify the financial products you own. For example, investing in stocks with private or state corporate bonds, investing in “private equity” companies or less traditional products like gold and silver.
Owning different financial assets protects you from the so-called market risk.
Third: The final difference in diversification is to diversify your portfolio geographically, investing in American, Asian and European companies.
So a successful diversification strategy is:
1. Diversification of investment in different sectors.
2. Diversification of geographical investment in companies around the world.
3. Diversification of investment in financial assets (stocks, bonds, currencies, etc.)
2- Exploration before investing
Obtaining information is the most important step to success for any novice investor.
And you must take into account the company you are investing in as well as the industry as a whole. Therefore, the collection of information must be comprehensive in order to be effective to know how to invest in the stock exchange. What’s the point of analyzing a company’s numbers and strategy if you have no idea what you’re going to compete with?
You will have to stay informed about what companies you will target in your investments are being said by the specialized press to sector or company experts. However, it will be important to ensure the expertise of your source of information.
3- Invest for the long term:
While it is possible to “beat” the market in the short term, it is always better to invest your money in the long term.
Many studies tend to show that the risk of loss decreases dramatically as the investment horizon increases, even considering the collapse of financial markets in times such as war, economic or health crises.
4- Learn from your mistakes.
“I never lose, either I win or I learn.” This famous quote by Nelson Mandela bears witness to the sometimes positive effects of error.
And no investor can claim that he did not make the slightest mistake? The important thing is to understand why the mistake was made. Was it because an investment was too grounded in emotion? Invest in a panic situation? In either case, it is important to analyze the cause of the failure to ensure that the error is not repeated.
5- Determine the degree of risk:
This point requires real work of knowing your financial dimensions.
You have to take into account your degree of risk aversion, as well as the investment horizon you want to direct yourself to. If you want to opt for a short-term investment, know that volatility is higher there. We advise you, always in order to diversify the risks, to also invest in long-term financial products.
6- Learn “Stop Loss” and “Take Profit”
When investing it is important to set limits for all scenarios both in the case of profit, and loss. These guarantees make it possible to rationalize your investment, thus avoiding panic movements. By setting limits even before investing, these limits are ‘Stop Loss’ and ‘Take Profit’ orders.
And if you stick to the previous point, there is theoretically no reason to panic, even if you are a novice investor.
It is important to know the reality of wanting to recover the loss that you just suffered quickly. Unfortunately, this is one of the main failures of investors who are new to trading or investing in the stock exchange.
Also try to remember that the position that suffered a loss should see a bigger increase. For example, a position that decreased by 20% should see a 25% increase in return. For a position that loses 50%, it requires a 100% increase to return to its initial level. And always keep this in mind.