When stock markets rise…they rise…This is why you call a rising stock market, a bull market. There’s just no stopping a bull market.In all this joy and euphoria you forget one thing. An investment in stocks, carries risk. Stocks go up and stocks go down. If you commit mistakes while investing in the stock markets, you have to pay for it with money.Losses in the stock market can be devastating.
When you buy stocks, you don’t buy a piece of paper. You buy a Company. You need to study the Company, you are investing in. What is the Company’s line of business?
Are you able to understand the business of the Company? How profitable is the sector which the Company is in? If you invest in a Company which is into oil and gas, you need to see how profitable, the oil and gas business is. If the oil and gas sector is doing well, you need to study the growth prospects of the oil and gas Company, you are investing in.
What does this mean? You need to study the fundamentals of the Company you are investing in, before making an investment. You must invest in Companies which have good growth and consistent earnings. Also take a look at the management of the Company, you are investing.
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If you are a good investor, you look for value stocks. These are stocks of good reputed Companies but have fallen due to reasons, beyond their control.There is a global recession. The stocks of even reputed and good Companies fall, even though they have sound fundamentals. These stocks are now value buys. You need to understand the difference between a value stock and a cheap stock.
In your greed to make money, you may buy hundreds of stocks of a Company; just because they are cheap in price. You get good returns from your investment in stocks, only if the Company does well and not because you buy hundreds of cheap stocks.
Remember: You will make money even if you buy a single share of a good blue chip (reputed) Company, rather than hundreds of penny stocks.
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You don’t cut losses
You buy stocks and make profits in a few months. You sell your stocks and enjoy your profits. What do you do if you suffer a loss in stocks? Do you sit tight, hoping that these stocks will rise in price, after a few months? This is a dangerous approach. If the stock has bad fundamentals, it could crash even further. You would be sitting on huge losses.
Study the reasons for the fall in the prices of the stocks. If the stock has good fundamentals, but is crashing say due to a global recession, it would bounce back in better times. However if the stock has bad fundamentals, it is pointless, holding such a stock. You must sell this stock and cut your losses. Invest this money in a Company with good fundamentals.
You have learnt some of the mistakes, you can commit while investing in stocks. Avoid these mistakes and make profits in the stock market.
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