Stock trading is a highly rewarding but risky business. Stock markets shoot up like rockets, but crash like a meteor sometimes threatening the extinction of some investors. Stock markets do tend to follow the economic growth charts, but the problem with them is the insecurity of the human mind. A hardly significant news, whether political or economic, can set off a chain reaction that destroys the dream of many a traders.
Here are a few tips you can use to invest in stocks. These are my personal views, but supported by sound arguments. The good thing about these guidelines is that they are not at all difficult to follow:
- Whenever you may have heard any suggestions regarding stock investments, one thing that you would have invariably heard would be: Invest long term. As I mentioned above, the human factor is crucial in stock markets. The reactions are swift and, if you are a short term investor, you may be left high and dry. But in the long run, companies grow and with them their stock values. Only care you have to take is the choice of companies.
- Invest only in shares that are included in the major index of that particular stock exchange (Sensex for Mumbai Stock Exchange, for example). Only the leaders in their respective fields are included in the index. Also, there are criteria relating to trading volumes based on which the stocks are selected. Even the governments are interested in the stability of a major index, as it an important indicator of a nation's economic status. By following this guideline, you minimize the chances of loss in many ways. I list here two 1) There is less chance of a company losing out 2) you would avoid as much as possible the possibility of not finding buyers when the stocks are going down, and you need to pool out.
- Link your portfolio to the index. That is, first study the trends of the index for the past few years. Say, the lowest the index went in the past three years, it was at 600. Make it a benchmark. Never invest all of your money if the index is higher than this. Keep at least one-fourth of your money; it should be invested only if the index goes below that benchmark.
- Set at least two more benchmarks, dividing the rest of your money into as many parts
- Invest at least half of your money for long term, and invest it when the index is lower than corresponding chunk of money. Say, you have divided your money like this:
$1000 Index range 600-700
$1000 Index range 700-800
$1000 Index range 800-900
Now, if the index is at 600, you would have $3000 invested in the market. If it is at 850, then only $1000 should be kept invested. In other words, as the index goes down, keep investing more, and vice versa. Keep an eye on individual index companies. One of them may be going in the opposite direction.
