The rules of investments

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The rules of investments

Trading on the stock exchange is frequently described as a stock exchange speculation or gambling. And as any gamble it comes with a particular set of rules. The success of an investor depends on his ability to adhere to these rules. Today we’ll speak about the rules of successful investors, following which the beginners will be able to avoid mistakes, instead they will invest with a higher efficiency.

Develop your investment strategy and use it

Unsystematic trading on the stock exchange is a recipe for losses. Before you trade on the stock exchange, you should develop your plan for what you should do to reach your financial goals by investing. You should define your investment horizon and the expected final effect. Then you should choose the tools allowing you to reach the result. When you answer the above questions, you will be able to develop the most appropriate strategy. However, planning your actions is not enough. You should hold to this plan. Otherwise, there is no sense in strategy development.

Be open for training

Today investment is available for not only professional speculators of the stock exchange. The beginners can also try this activity. They are suggested to invest in mutual funds or assign their authority to a professional company to trade on their behalf. But even in this case it is important to have at least an overall comprehension of how the stock exchange works. However, you will not become a successful investor until you rely on others. That is why you’d better gain insight into investment by yourself. Consider different strategies, reveal the common patterns, learn more about the secrets of the skilled traders and investors. In short, try to find out as much as you can about the activity you are involved in. Read books about investment or blogs of successful investors, view various training videos or sign up for a training course. But you should understand that not all information is useful. You should filter the information you get.

Never invest in a business you cannot understand.

If you have decided to invest into stocks, you should remember that the stocks are a part of the company assets. Their value will depend on the success of this company. If you do not understand the business area of the particular emitter, you’d better refuse buying their stocks. Otherwise, you will not be able to evaluate a potential capacity of the company and investment returns. Once, the famous investor Peter Lynch compared a purchase of the stocks issued by a company involved in the activity, which he did not understand, with a poker game he played without looking into his own cards. You should not buy the assets of a company engaged in activity you do not comprehend, even if everybody says that this is a very profitable idea to invest in those stocks. Investor should understand the peculiarities of the business if he is going to become a stockholder of the company involved in it.

Spend only not immediately required funds on investment

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If you have decided to buy the stocks with the last of your money, this is quite unreasonable and unwise. You should remember that trading does not always result in gain. You may increase your deposit as well as you may lose it. And nobody can be sure of the outcome. That is why you should invest only that money which you are ready to lose in case of failure. Your investment activity must not become a reason for decline of the quality and standard of living. There is no point in denying yourself everything in order to invest your money in the securities.

Go easy on margin trading

Margin trading means leverage trading. You use leverage (borrowing from a broker) to increase your deposit several fold and open trades with much larger values. Such a tool allows you to increase your potential return. For instance, the leverage equal to 1:100 allows a trader to buy assets at the cost exceeding his own deposit hundredfold. But there is the reverse of the coin. The losses may increase several fold too. There is even a risk of losing your whole deposit. Besides, usage of leverage makes it difficult to evaluate risks with an objective mind.

Do not forget about diversification

Diversification of an investment portfolio is a key rule of successful investors. Diversification allows you to reduce the risk of loss by developing a portfolio including different assets. In other words, if your investment portfolio consists of various types of assets, chances are high that when the price for some of them falls, there will be a rise in the price for the others. You can diversify the assets in several ways. For instance, instrumental diversification means that you are expected to develop a portfolio using the assets of various categories. The most efficient solution will be to buy several various assets in preference to investing all money in stocks or federal loan bonds only. The point is that different assets are sensitive to the same circumstances to different extent. And in the event you suffer losses on some of them, you will be able to cover these losses thanks to profitable tools.

Do not refuse analytics

Investing without understanding of the current market environment is like playing a lottery game. By a lucky chance you may make a profitable deal without thinking too much. But at the same time you may invest your money in absolutely losing tools. In order to reduce the risk of making stranded investments, you should analyze their effectiveness. That is why before you make an investment decision, you should carry out careful market research. You can use the ready analytical content or investigate by yourself. Most investment companies and brokers release analytical reviews and even their investment ideas. If you decide to carry out an analysis by yourself, you will have to study the information about a chosen emitter. Also it is a good practice to analyze the economic sector, which the company is involved in. You can find the needed information about economic performances in various statistical sources available to the general public or on the special-purpose websites. Also, such an option as an Economic calendar will be of help when you make a fundamental analysis. This is an aggregator of the most significant news of the global economy. Usually brokers or investment marketplaces provide access to this feature. For instance, you can enjoy it for free on the website of Bristol House Corporation or Zero Markets.

Keep control over your emotions

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The key enemy of an investor is emotions. Impulsive trades made out of emotions can hardly be profitable. The main emotions which can prevent an investor from acting rationally are fear and greed. Being affected by any of these factors, an investor can buy and sell the assets at the most inappropriate moment. Even positive emotions can have an impact on reasonable investment solutions. Excitement caused by a successful trade and overconfidence also can lead an investor to make thoughtless steps. The specialists recommend investing with a cold heart and a cool head. If you feel an emotional lift, you’d better refuse to make a deal. Return to the stock exchange when you will be able to assess the situation with an objective mind.

Do not run with wolves

The reputed and famous investor Warren Buffett wrote: «Be fearful when others are greedy, and be greedy, when others are fearful». These words mean that an investor should not go with the crowd. When there is a rise in stock value, a lot of traders want to buy such stocks thinking that the increase in price will continue. And, vice versa, when the stock value decreases, most traders start to get rid of such stocks to minimize their losses. But Buffett recommends not to follow the crowd and act in an opposite way. It will be much more beneficial if you sell the stocks, when there is a high demand for them, to lock in a profit. And a moment, when the value of securities decreases, is the best time to add to your investment portfolio.

 

 

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