The idea of investing in stocks is a no go area for many because of the uncertainties sorrounding the stock market. But investing in stocks is indeed one of the recommended ways of building a lasting wealth. Read on to uncover 5 tips that will set you firmly on the path to profitable stock investing activities.
1. Investing is Different from Trading, Investments Need Time to Mature
Investing is different from trading and while all investors trade stocks to one degree or the other, not all traders are investors. The key difference between investing and trading is that investors buy stocks to obtain ownership in companies whereas traders buy stock in order to make a profit when the share price appreciates. Hence, you should be sure to decide if you want to be an investor or a trader.
It might interest you to know that investors tend to keep their stocks for longer durations than traders because they are actually more concerned with the big picture in 5, 10, 20 or 50 years from now while traders tend to hold stocks for about six months. Hence, as an investor you should be less concerned about the short-term prices changes in a stock inasmuch as you are sure that the business fundamentals of the stock in intact.
2. Buy Great Companies whose Business you Understand, Avoid Speculation
If you want to invest profitably, you should limit you investment activities to the stock of companies whose business you fully understand. For instance, if you have a background in the finances, you might not do well investing in biotechnology stocks because you won’t understand much of the underlying business.
If you are interested in investing in stocks outside your areas of expertise, you should be ready to devote the time and resources needed to learn all you can about the underlying business. A firm understanding of the core business fundamentals will help you to stay grounded as the company alternates between bullish and bearish cycles.
3. Allow Your Profits to Run and Make Sure to Cut Your Losses in Good Time
The fact that investors are usually in a stock for the long haul does not mean that you must maintain ownership in a stock for eternity. If you buy the stock of a company and the share price starts to tank because of a change in business fundamentals, you should conduct due diligence to see if the change in business fundamentals is for the short term and you should find out what the management is doing to address the issue.
If the change in business fundamentals is permanent, you should not hesitate to sell off your holdings and run with your losses or gains as the case may be. The key here is capital preservation and there is no point is staying on a sinking boat because you love the vessel.
4. Your Portfolio Can’t be Too Diversified
Do I need to say this again? Don’t put all your investment eggs in one basket because you’ll be left with less than nothing if the basket is destroyed or if the eggs are smashed. Diversify across different sectors of the economy and then diversify some more with different classes of companies in the same industry.
5. Investment is A Full-Time Job
Many people buy shares in a company and the go to sleep in expectation of dividends at the end of the fiscal year. When such people need to sell the stock, they’ll call their stockbroker to find out how much stock XYZ is trading now and then sell the stock if there’s a profit to be made.
However, the fact remains that investment is a full-time job and you must at least be willing to take it as a part-time job if you want something reasonable out of your investments. You can’t just buy shares and check in occasionally when you are less busy to see how your portfolio is behaving.
This is not to say that must tinker with the stocks in your portfolio every now and then; nonetheless, you must set aside some time to examine the performance of the stocks in your portfolio and the fundamentals of their underlying businesses.