Finding ‘Safe Haven’ in stormy stock markets is difficult but once you know how it is done it becomes your easy money source. Leo Oommen tells you the basics to invest in the stock market
‘I have enough money’
said no one ever. We all have goals to accomplish and they do require money. Some of us would like to live certain luxurious lifestyle, some would like to enjoy the experience of travelling in their 20’s or 30’s but what stops them is not having enough money. For youngsters having that extra earned money is truly bliss. The question arises of how and where to invest your money so that you receive long term benefits of it. Like you learn skills even investing is a skill you need to learn; a different skill to grasp and it is best to start young. Having enough money to get through your golden years and take care of your family is definitely something you will be concerned about as you get older. The fact is, the sooner you start investing, the more money you’ll have to live on as you age.
Many young adults don’t take the time to understand how to invest wisely. In many cases, this is because they are concerned about the here-and-now, not the future.
While you don’t have to forgo your lifestyle when you are young, taking a long-term focus and investing consistently over a long period of time will ensure that your savings and net worth are there when you need them. Missteps are common when learning something new such as investments in stock market, but when dealing with money, they can have serious consequences. Investors who start young generally have the flexibility and time frame to take on risk and recover from their money-losing errors.
While investing may seem a bit intimidating in the beginning, it’s important to understand the very basics of investment and what you can hope to gain from them. Know the jargon:
Stocks, Stocks, Stocks
All you hear is stocks when you enter this market. Stocks are listed on exchanges like in Mumbai certain companies are listed on Bombay Stock Exchange (BSE). The stock market is a place where stocks/shares are bought and sold. Securities are simply investments which can be stocks, bonds and mutual funds.
The Equity Owner
When you are the equity owner of the company it means you hold a share/stock or part of shares of the company. When you buy a stock, you’re buying a tiny little piece of an actual company. Not a lot, but ownership nonetheless. Stocks are more volatile than bonds, and may therefore yield greater rewards or losses.
Bonds and Loans
When you purchase a bond, you’re essentially loaning a little money to an entity – like the government, for instance – and that entity has to pay you back after a fixed period of time, with interest. There aren’t bond exchanges that show up in a ticker, because bonds are traded differently than stocks.
Diversification means spreading your money out among different kinds of investments. There are a lot of opinions out there about how diversified an investment portfolio needs to be, but most everyone agrees that putting all of your financial eggs in one basket is a recipe for disaster.
ROI means Return on Investment. The ROI is how much money you make on your investments. To get an idea of how well your investments are performing, you can calculate the ROI by dividing an investment’s gains by its costs. Although no sure-shot formula has yet been discovered for success in stock markets, here are some golden rules which, if followed prudently, may increase your chances of getting a good return.
Procrastination is never good, but it can be especially detrimental while investing because the markets move so quickly. Good investment ideas are not always easy to find. If, after doing research, a good investment idea arises, it is important to act on it before the rest of the market takes note and beats you to it. Young investors are prone to not acting on a good idea out of fear or inexperience.
Stop Speculating, Start Investing
Instead of speculating and gambling, a young investor should look to invest in companies that have higher risk but greater upside potential over the long term. A young investor is at an advantage in his or her investing life. Holding the level of wealth constant, an investor’s age affects how much risk he or she can take on. So, a young investor can seek out bigger returns by taking bigger risks. This may seem like an argument for a young investor to speculate, but it is not.
Ask Enough Questions
Be curious, be energetic and be active. Ask why something is happening. Usually young investors tend not to speak about it to an expert or someone who is already in the field for years due to assumption of feeling inferior. One of the most important factors in forming investment decisions is asking why. If an asset is trading at half of an investor’s perceived value, there is a reason and it is the investor’s responsibility to find it.
“Like you learn skills even investing is a skill you need to learn; a different skill to grasp and it is best to start young. Investors who start young generally have the flexibility and time frame to take on risk and recover from their money-losing errors.”
Have Realistic Expectations
‘Hope for the best and be prepared for the worst’ this works aptly even for the stock market situations. It is good to have expectations but make sure that they are realistic in nature. Do not create your financial goals on unrealistic assumptions.
Don’t Let Emotions Ruin You
Many young investors have been losing money in stock markets due to their inability to control emotions, particularly fear and greed. In a bull market, the lure of quick wealth is difficult to resist. In a bear market, on the other hand, investors panic and sell their shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
Avoid The Herd Mentality
The typical buyer’s decision is usually heavily influenced by the actions of his acquaintances, neighbors or relatives. The herd mentality would backfire you in the long term. If you do not want to lose your hard earned money, do not follow where the crowd goes. The world’s greatest investor Warren Buffett was surely not wrong when he said, “Be fearful when others are greedy, and be greedy when others are fearful!”
An investor has the best ability to seek a higher return and take on higher risk when they have a long-term time horizon. Investors have their longest time horizons, and therefore a high tolerance for risk, when they are young. Young people also tend to be less experienced with having money. As a result, they are often tempted to focus on how money can benefit them in the present, without focusing on any long-term goals (such as retirement).
Just saving money is great, but it does not offer much, if any profit like an investment can. Being patient is the key to seeing the benefits of investment, so remember that while it seems like you’re giving your money away at first, it will be well worth it in the end when you get that final return on all of your hard work and money invested. Not only will you have money for the future, but investing can be fun as well.