Top 10 Rules of Stock Market Investing

Top 10 Rules of Stock Market Investing Top 10 Rules of Stock Market Investing Nabil Shaukat Butt - FCCA, ACA, AFPA, MCom, BSc HonsNabil Shaukat Butt - FCCA, ACA, AFPA, MCom, BSc Hons Nabil Shaukat Butt - FCCA, ACA, AFPA, MCom, BSc Hons Chief Financial Officer | Group CFO | Real Estate Investment | Familly Office | Capital Markets | Portfolio Investments | IPO | M&A Expert | SAP | Fintech Expert | FP&A Published Oct 24, 2022 + Follow The stock market can be a great way to build wealth, but it’s not something that you should dive into unprepared. The stock market is volatile, and there are a lot of emotions that go into investing. These 10 rules are a good starting point for your stock market investing. You can use them as a checklist when you're considering an investment and they will help you avoid common mistakes. They won't tell you exactly what to buy or sell-that's part of the art of being a successful investor-but they will help you avoid common errors that may lead to losses. Knowing these rules will help you ensure security of your principal and steady increase in the value of your investments. These rules are not a substitute for research into individual companies, and no rule is set in stone. Investing is an ongoing process that requires constant monitoring of your portfolio and its composition, so it's important to remember that no one strategy or approach works forever; even if you're following all of these rules, there will still be times when things go wrong and investments fail (although in general following these guidelines should minimize those occurrences). The best way to use these rules is alongside other resources such as financial websites, books like The Intelligent Investor etc., which give more insight into why certain choices were made along the way (and allow investors access to information not publicly available) Rule No. 1: Know What You Are Buying The first rule of investing is to know what you are buying, why you are buying it, and when to sell it. This may seem obvious, but many people get caught up in the excitement of a stock market rally without having done their homework on the company they are investing in. The most important thing you need to know before purchasing any stock is what sector it falls into and how it fits into your portfolio together with other stocks and bonds that make up your investment strategy. The same goes for mutual funds or exchange-traded funds (ETFs), which are baskets of securities like stocks and bonds that trade as one unit on exchanges rather than being traded individually like individual stocks do such as Hong Kong’s Hang Seng index, The SPDR S&P 500 (SPY) etc. Knowing how these funds fit into your overall financial picture will help ensure security of your principal and consistent growth in your Net Asset Value (NAV). Note: When you are buying any stock or mutual fund, it is very important to do research on the company first and then decide if it is a good investment for your portfolio. If you are not willing to take the time to learn about what you are buying before you invest in it, then perhaps you should stick with index funds that track the market as a whole rather than individual stocks or funds. Rule No. 2: Buy When People are Fearful, Sell When People are Fearless This is the most important rule in stock market investing. Buy when people are fearful (means they are selling and market is low/bear market), and sell when people are fearless (means they are buying and market is up/bull market). In simple words, when investors are greedy/fearless then prices of the stocks normally boil so at this time you should not buy (as shares are overpriced) but sell and when investors are fearful then the stock prices normally reduce as investors are selling for low prices hence you have the opportunity to buy a stock at comparatively less than its real market value. Rule No. 3: Be an Investor, Not a Speculator Be an investor, not a speculator. An investor secures his principal and generates steady return whereas a speculator is a risk taker and buys/sells securities without a solid/logical reason e.g. reacting due to a news in the market. You have invested in an organization, not a piece of paper which is called a share. Act like an owner and don’t make your decisions of buying and selling based on speculative news. Rule No. 4: Diversify Diversification is crucial if you want to minimize the risks associated with investing in the stock market. It doesn’t matter how much you know about the market, there will always be some kind of risk involved when it comes to investing so by diversifying your portfolio, you can minimize those risks and make sure that whatever happens, your money will not be lost completely. This means investing your money in a variety of different companies (even if they're in the same industry). The more companies you invest in, the lower the risk that one company's poor performance will affect your overall profits. One of the best ways to do this is by investing in mutual funds. Mutual funds are a type of investment vehicle that allows investors to pool their money together so they can purchase securities such as stocks, bonds and commodities (gold, silver etc). They're managed by professional portfolio managers who invest your money based on the fund's stated investment goals and objectives. Recommended by LinkedIn 💼📈 Breaking Down the Basics of Stock Market… Chad Theisen Your Seasoned Agent 1 year ago The Second Dumbest Kind Of Money Is Pouring Into… Matthew H. 7 years ago Golden Rules of Investing in Stock Market!! The Power… Akhilesh Jain 7 years ago Rule No. 5: Study the Markets and Economy You need to study the markets and economy. The market is composed of stocks, bonds, ETFs and mutual funds. Studying these will help you understand how each asset class works so that you can make better choices at the time of investment. If you are interested in options trading, then it would be ideal for you to study technical analysis before jumping into this type of trading strategy as it gives insights about future price movements based on past price actions. Note: Options are risky and not recommended. Rule No. 6: Know Your Brokers and Investment Advisors Simply put, inexperienced brokers and investment advisors mean partial or in some cases significant loss of your investment. This is one of the most crucial decisions an investor makes. Hence, make sure to ask and investigate as much as you can before choosing a broker/advisor. Some of the important things to consider are as follows: Experience of your brokerage firm/advisory firm; Experience and profile of the manager assigned to you, make sure to interview your account manager in as much detail as possible; Ask and verify the historic results achieved by the firm and your account manager; Ask and try to independently verify their performance i.e. an online research can be very helpful; Know his/her history and reputation in the industry with respect to customer service, ethics and quality of advice given over time; Check how much fee you will be charged. Some brokers charge as little as 0.50% per year while others may charge as much as 2% per year on investments held within their particular brokerage firm's accounts. It really depends on what kind of services that particular firm provides its customers with regards to research tools, education seminars & workshops etc.; Perform conflict of interest testing i.e do they want to put your money in shares/funds which can directly benefit the brokerage/advisor firm? Rule No. 7: The Market Is More Responsive to Bad News than Good News The market is more responsive to bad news than good news. Good news is already priced in. When a company reports a positive return, the stock typically goes up as soon as the results are announced. But when the company misses expectations and its stock falls in response, it's a much bigger deal than if it had risen on an earnings beat. This behavior is called "price erosion" and can be seen all over Wall Street. No matter how big or small you are, everyone wants their piece of your business after you report better-than-expected results—but they'll run away from you faster than Usain Bolt if you miss or fall short of expectations (or even just have an uninspiringly average quarter). Key for the investor is to focus on the business he/she has invested in, be patient, control nerves and don’t immediately react to market news. Rule No. 8: Review Financial Statements Reviewing financial statements of the company is mandatory for a successful investment. Financial statements alone give you most authentic information about the company’s past performance, present financial position and performance, retained earnings and reserves, it’s liquidity, debts, and indication of future growth of the company. If a company’s sales are showing a decline over the last few years, the profits are reducing or losses are increasing, debts are high or increasing, assets are less than its liabilities, this means this is not a good investment target. Rule No. 9: Review Important Financial Ratios Understanding some of the very important ratios is integral when it comes to investing. For example, it is important to invest in companies with a low price-to-earnings ratio (P/E ratio). A low P/E indicates that the stock price is below the current level of profitability of the company and therefore represents good value for money. The opposite applies if you are buying shares of a company with a high P/E ratio, as this indicates that their stock price has risen too far above their earnings per share levels and therefore represents poor value for money. Similarly, consider investing in companies with a high dividend yield. You can find out how much your dividend yield is by dividing your annual dividend payment by your original cost per share (including brokerage fees), then multiplying it by 100% to get an accurate percentage figure that shows exactly how much profit is being paid out to shareholders every year along with their initial investment amount once all other expenses have been accounted for. Other ratios to consider are EBITDA, EPS, Debt to Equity ratio, ROE, etc. Rule No. 10: Use Common Sense and Logic to Make Decisions When considering a new investment opportunity or making an existing investment decision, always ask yourself if what you are doing makes sense logically and if there are any obvious flaws with your approach. Do not fall prey to emotions because they can often lead us astray when making important decisions such as these ones. 2