In what way do you want to participate in the buying, selling and potential profitability that can only be found in the stock market? Will you be a speculator or an investor? Answering this fundamental question before risking your hard earned dollars in the volatile world of stock trading is crucial to how you approach investing.
Speculating involves an exercise of reason. It requires having the ability to gauge the movement of the market at any given time and make well informed decisions on when to limit your risk on a investment security, in this case stocks. An investor, on the other hand, buys stock in a company with the expectation to exact a reasonable rate of return on his investment over a long period of time. The time frame is usually determined by years, not hours, days or months. In short, speculators seek large profits over brief periods, whereas, investors seek a reasonable yet gradual rate of return on their investment(s) over the long haul.
While there is the potential for significant profitability on either extreme, it is the motivation behind the risk that remains the allure for those willing to participate in the free market system. Thus, the question must be asked and answered, “Why are you participating in the stock market?” Is it for short-term gains or long-term profitability? While there is nothing that says you can’t attempt to do both, answering this basic question beforehand is crucial to limiting your risk while also reaping the rewards that comes with investing in the stock market.
So, how do you minimize your risk and assure a high degree of profitability? Start by keeping these four basic rules in mind:
You must accept the fact that there is a high possibility that you may lose money in the stock market. There’s no guarantee of wealth attainment. Therefore, you must enter into investing with a clear understanding of how much capital you’re willing to put at risk and the very real possibility that you may lose your investment. But as the saying goes, “no risk, no reward”.
Increase your knowledge about stocks and the stock market starting with the basics:
Study the business, the industry and market trends before investing. The more you know about the company, the industry in which it operates (i.e., retail, tech, manufacturing, energy, real estate, etc.) and the changes within the industry, specifically where new innovations are concerned, the better, more well-informed decisions you’ll be able to make concerning your investments. Knowledge is power! Three informative resources I’d recommend for beginners who wish to increase their knowledge on investing are: a) “How to Buy Stock,” by Louis Engel, b) the annual 10K report of the company you wish to invest in as filed with the Securities and Exchange Commission (SEC) and, c) the Wall Street Journal. The more you know about the company and/or the industry you wish to invest in and are able to gauge market trends, the better you’ll be able to make well-informed decisions concerning your investments instead of basing your decisions on emotions particularly during times of frantic market fluctuations.
Know when to walk away. Knowing when to sell a stock is just as important as knowing when to buy a stock. This is different from attempting to “time the market” – jumping in or out at the perceived optimum time to buy or sell a stock. Many a speculator and investor have tried doing just that with mixed – if not disastrous – results. While it’s important to know when a stock (if not the market) is on an up tick (bull market), it’s also important to know when a stock (market) is on a precipitous downturn (bear market). Stock charts play a vital role in providing the speculator and investor alike with the insight they need to make timely decisions as to “when to hold ’em and when to fold ’em.” You should cut your loses when the value of a particular stock drops no more than 8% below its highest price gain. Anything more and you risk losing significant gains from your profit margin. Knowing when to cut your loses is key to minimizing your risk with any investment particularly in the stock market. So, take time to learn how to read stock charts and make them an integral part of your investment knowledge base.
By following these four basic rules of investing, you can minimize your risks and increase your potential for profitability for both the short- and the long-term. But you must first answer the most crucial question concerning your investment future: Are you a speculator or an investor?
That’s my blogpost for this week. Join the discussion by posting your comments below. And don’t forget to tune in next week where I’ll once again share more ways you can break the debt cycle and then go…beyond.
Zebert L. Brown is the author of Break the Debt Cycle in 3 Simple Steps and a 16 year Navy veteran with specialties in administrative management, career development and public relations. Like me on Facebook and Follow me on Twitter.