Basic Principles of Investing in Stocks

1. When should you start investing in stocks?

Consider this fact to answer this question: Every six years that you wait, will double the time required for your monthly savings to reach the same level as your retirement income. So the best time to start investing is now.

2. How much to invest in stocks?

To arrive at a conclusive number, you need to take a close look at your finances, your future goals, and your expectations. Answer the following questions before deciding on the amount that you can safely invest:

• What is your monthly income?

• What is your net worth?

• What is you average expenditure and are there any areas where you can cut down on them?

• Have you taken any loan or mortgage?

• What are your savings and how much are you earning on them?
Based on the things above, calculate the amount you have to invest in stocks and shares. Also take the amount that you should keep for emergencies into account.

3. How much risk are you willing to take?

This is an important factor that will help you decide your investment portfolio. Basically, you can invest in short-term, medium-term, and long-term stocks. The risk factor is the highest with the short-term stocks and the lowest with the long-term stocks. On the other hand, you stand to gain the highest from the high-risk stocks and the least from the low-risk ones; conversely you also stand to lose much in high-risk stocks if the company incurs a loss. Given this, plan your investment strategy in such a way that you do not put all eggs in one basket; plan in such a manner that you gain from the high risk stock and at the same time ensure that in case you lose, you have some low risk investment to fall back upon in case a situation so arises.

4. Are your finances in order?

In case you are carrying a debt, it is important that you first pay it back and then consider investing in stocks. Once you have paid back the debt and have graduated from a pay check-to-pay check situation, you should first start building a saving fund to cover the expenses for the next three to six months in case there is an emergency. Once you have built this fund, you can start investing in stocks, bonds, or mutual funds.

5. Which stocks to buy?

There is no magical formula for this. To invest in stocks, you will need to study the stock market carefully. This involves a lot of patience and discipline but at the end the day, a right move will help you reap rich dividends. Do not be carried away by rumors; make your decisions after a careful analysis of a company’s growth trends and its business model instead. Read financial articles in the newspapers or browse through the Internet. You should be familiar with the basic financial terms and also the ratios which can give you better picture of a company’s performance over a period of time, Then there are a wide array of stock trading tools and software available on the Internet that can help you with the calculations and predict the upside or downside of a stock in the near future. Remember that the prices of the stocks do not only depend on the performances of the company; outside factors, such as a tax change policy introduced by the government can also affect the prices. Therefore, an understanding the prevailing economic scenario of a country is also necessary. In case you are not comfortable about making a decision on you own, you can seek the services of stock trading companies, full-service discount brokerages, or online companies, to plan your portfolio.

6. Do you have the right attitude for investing?

This may sound surprising but then having the right attitude will help you deal with the vagrancies of the stock market. The foremost is to be disciplined in your approach. You may not make profits immediately; learn from your mistake, sharpen your observation and make changes in your plan wherever required. I t is also important to emphasize that discipline will make you keep your emotions in check. It has been rightly observed that people make the wrong decisions due to either the fear or greed factor. Remember the right time to buy is when the market is down and sell when the market is up. Yet, the moment the market is down, the people react in fear and instead of holding on to their stocks, they sell it and thereby register losses. Similar is the case of the greed factor. When the market is up, instead of selling, they hold on the stock thinking they would sell when the market goes further up. When this does not happen, they end up holding on to the stock, which they should have sold in order to gain profits.