There is no doubt that the stock market is a great place to turn your savings into wealth. But you will again need to be guided by some helpful tips once you make the first start at share investing.
· Establishing a clear investment objective: what do you want to achieve by investing?
· By having a clear idea of what you want your investment to accomplish, you will be in a good situation to put your money to work for you through investments.
· If your overall aim for investing is to become financially independent, you should form the habit of investing regularly to achieve the objective.
· You don’t put down some money once and go to sleep, No! In order to realize any plan at all, you need to constantly work it into fruition. This is also true of your investment plan.
· The winning strategy is not how big the amount you invest at a time but how constantly you invest the amount that is within your financial reach.
There is risk in share investing
You need to understand that risk is associated with investment in shares and this will prepare you in the event you pick a bad investment.
· It should be clear to you that by investing, you are converting your risk free assets into risky types against the expectation of higher return. The good news is doing this is that the risk is commensurate with greater rewards for investors.
· The general rule is that the higher the return you are likely to get from an investment, the higher the risk of that investment. If you venture nothing, you gain nothing. By seeking expert advice in addition to helpful tips, you will be able to minimize risk and build a portfolio of high quality securities.
Risk in investment is the possibility that actual return may be less than the expected. That is, for instance, you buy a particular stock or stocks with the expectation that the prices will appreciate by so much, you will receive dividend and/or bonus issue within a given period. The risk is that some or all of these expectations may not happen to the full extent of your expectation. To the contrary, the price could fall such that if you are to realize the investment at that point in time, you will get something below the amount you originally invested.
Investment risk is therefore the chance that the expected return less the actual could be greater than zero. The higher this possibility, the higher the risk associated with the investment. The smaller the chance of the expected return less the actual being greater than zero, the less risky the investment. If the expected less the actual is equal to zero, the investment is risk free. Examples of risk free investments are government treasury bills and other fixed income securities. In general terms however, no investment is entirely risk free.
Risk management strategies
Spreading investment risk is the critical element of successful investing. You may have big money in one or two investment baskets but the chance is high that the many imponderable the surround share values could puncture all the important basket and drain off the wealth in it. You need to have money in not more than a dozen different shares to achieve a reasonable spread of investment risk. Even if you are limiting your investment to the perceived low risk blue chips, you still need to spread the risk: blue chips do hit bad years.
Since there is no certainty about the return from share investment, the risk involved is quite high. For a single stock portfolio, the risk is simply that the return from that stock is not equal to the expected benchmark. For a six item portfolio, the risk is that the weighted average return from the six will be less than the expected return for the six.
The first strategy for managing investment risk is to include as many different shares as possible in your investment portfolio. The risk of the multi-basket portfolio will be lower because it is very likely that some of the investment choice will yield excellent returns, some average and some poor. The excellent will neutralize the poor and most often raise the average to very good. The risk of a portfolio is therefore influenced not only by the risk of variability of returns of component assets but more importantly by the interrelationship of returns of those assets. Hence the portfolio risk is lower than the simple weighted average risk of the individual assets.
Your investment in the stock market needs to touch several stocks across various market segments rather than concentrate on stocks in just one sectoral grouping. This is to ensure that even if the construction sector faces a bad season, the rally in the petroleum industry will provide the necessary shock absorbers to stabilize your portfolio value.
The wisdom in having different baskets however does not mean you shouldn’t invest more in a company or sector if you think that it has more prospects than others you are yet to touch. It also does not mean there is no limitation to the number of different baskets your portfolio should contain. You don’t need to have too many shares, as it will not be very easy keeping track of all of them.
You are not to just put some money in one or two stocks and sit back to watch and complain. That is not the idea for successful investing; the risk in doing that will be high.
Another risk management idea is don’t speculate, have a long-term view of your investment. No doubt, everyone would wish to buy low and sell high; sell high and buy back low and maintain that kind of favorable cycle in all of one’s investing life. But it is not practically possible to follow the peaks and troughs of stock prices perfectly; to know at what point a rising price will turn down and at what point a failing price will turn back.
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