There is no right or wrong formula for investing in stock markets. It depends on the understanding of an investor. If you were to randomly buy stocks just because you got a hot tip or news, your chances of being profitable will be 50% at best. Since a stock either goes up or down, you only have a 50/50 chance of being right.
Of course, with some luck, you could still make money. Eventually, luck will run out and you will end up losing everything and much more. This is why people who gamble at the investing in stock markets will end up losing everything.
But when you have a method or rule that gives you an edge over the market, you can confidently be right 70% – 80% of the time. You can never be right 100% of the time because many factors in the world of investing that are out of our control.
Therefore, Stock Market Investment should never be news driven or based on recommendations of stock analysts. Always do your analysis and invest once you are convinced about your Stock Market Investment.
5 golden rules of investing in stock markets
1. Never Invest in A Single Stock
The fear and greed factor play very imp role in this golden rule. According to modern portfolio theory, 15-20 stocks from different sectors are enough to make a well diversified equity portfolio. The basic objective of diversification is to reduce risk. Though everyone would love to earn high returns without taking any risk.
2. Invest in business you understand
Never invest in a stock. Invest in a business you understand. In other words, before investing in a company, you should know what business of the company. In order to be successful investors, we must acknowledge that there are some types of companies we understand, and some we do not understand, and then we must only invest in what we understand.
3. Right Time to Buy & Sell
When you have selected the stocks for investment, you must decide whether it is the right time for investing in that stock. The only rule is to buy low and sell high. If you buy good stocks and hold on to them for a long period of time, you will make a lot of money. For this, you must technically analyze the price movement of the stock and determine the right price level when you should buy and sell the stock.
4. Control your emotions
Many stock traders lose money. They don’t control their stock trading emotions. This is one of the biggest mistakes any trader or investor can do. In a bear market, investors are afraid and sell their shares at low prices. Therefore, when investing in stock market fear and greed are the worst emotions to feel. Emotions are always present in stock trading. But the profitable stock traders learned how to control them.
5. Disciplined approach to investing
Investment discipline isn’t easy. Even when there is a long-term plan in place, if it’s not followed, the plan is useless. The investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns. Discipline in investing is about forming good habits and then doing them consistently.