What are the rules for investing? Here are 10 for you!In this post called What Are the Rules for Investing, we have put together a list that will hopefully give you some ideas when preparing an assault on the financial markets. How to decide investment strategy can be a daunting question requiring careful thought and a set of rules can provide some useful safety buffers. You are most probably bombarded with stock tips and emails with the next Microsoft or BP making it difficult when choosing your portfolio candidates. Before you invest your funds you should develop your own list of rules for investing when choosing stocks, here are some rules that may just help:
- Learn about what makes stocks move – There is a myriad of reasons of why a stock will move. From individual company announcements, sector changes through to who gets elected in another country, these have a massive effect on all the stocks that you own. As stocks are all different businesses some will move with the announcement and some will move against. Try to learn about financial statements as when a company announces these you will find golden nuggets of information in there.
- Work out your financial objectives – Why do you invest? If you are 65 and need to conserve your capital, then you should look at extremely low risk positions which will not cause any concerns. On the opposite side if you are 28 and are looking to the markets for high rewards, you must have to take higher risks.
- Pick a strategy – As mentioned, how to decide investment strategy is a key consideration! Are you an investor or a trader as they are different. If you like to invest in stocks then you will view it from a fundamental position and you should learn about its EPS, Dividend Yield & Debt. If you are investing and MUST have a dividend make sure the business has good dividend cover. If you want to invest in the short-term then you should learn about technical trading based on indicators that you overlay onto a chart. But always remember that fundamental news will always outperform any technical strategy that you run ie news that BP have just had a severe oil spill and the share price reacts with extreme pull back then the technical indicators will not mean anything.
- Do your research – Pick stocks with a business model that you understand. What are its prospects, how do its peers perform in the sector, how is the brand seen across the news and social media, how well is the brand reviewed online? Along with fundamental and technical research, this should also form part of your research. Also, remember that past performance of that company does not necessarily mean it will continue in the same way.
- Follow the trends – You have heard the saying don’t try to catch a falling knife. This also equates to stocks as you can think that a stock is cheap when it is in free fall and you think it has reached the turning point. On many occasions, it was not and kept on falling after your order went through.
- Think like you own it – the best investors like Warren Buffet think like they own the whole business.
- Manage your risk – With some products you can leverage your investment by trading CFDs or options. This means that your profits are multiplied, however this also means that your losses are also multiplied so beware and ensure you research this fully.
- Spread your investments – There once was a farmer who learned a valuable lesson that he passed on. If he held all his fresh eggs in one basket and the dog knocked the basket over while chasing the cat he would be left with a mess. And no eggs. Same principal applies with stocks. Do not put all your wealth into one stock as things can go wrong. Many employees of Lehman Brothers found this out in 2008 when after investing much of their own wealth into the company pension scheme through the quoted stock were left with a terrible scenario when the whole thing went pop. They were left with no job and their funds up in smoke. If they had spread their risk this could have been avoided.
- Think from a macroeconomic point of view – What could happen globally in the next 3 to 6 months that will have an influence on your investments. Brexit or Trump or the EU – How could this be included in your strategy? How will this affect your rules for investing?
- Try to have fun! As if it is too serious, you have too much on the line and too much at risk.
So, please understand that these are not the only rules for investing, there are many more than we have listed here but I hope you enjoyed our post and it gives some guidance.
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