Most people believe that to be successful in the stock market is to hold a high-performing set of stocks. However, there's much more to it. While equities offer the thrill of growing your money, you need to follow some basic rules to invest in the share market. Below are ten golden rules you may want to consider to help you mitigate your risk and ensure long-term success.
Golden Rule #1. Establish Your Financial Goals
Are you looking to trade in the stock market? Why do you wish to invest? Your goals may be unique and personal. However, regardless of what you're trying to accomplish, you need to take a pragmatic approach.
With planning and foresight, you can set down goals you need to achieve within a specified timeframe. So while your investment goals may take various forms, they need to be concrete milestones with predetermined time frames to achieve them. These include growing your wealth to supplement your active lifestyle ten years from now. Or, perhaps you're looking to preserve capital and maintain your net worth after retirement. Or you may even be looking to send your children abroad for higher education, fifteen years down the line.
No matter your goals, translate them into number-based terms to obtain a more realistic perspective. Whether it’s aggressive, moderate, conservative, understanding your risk tolerance may help build the right portfolio to match your investment goals.
Golden Rule #2. Choose Your Approach to Risk
Some types of investments hold more risk than others. Stocks, for instance, are considered risky. However, stocks also offer a potentially higher return than fixed-income products over the long run. Understand the risks that come with stock market investments to help you feel more confident in your decisions.
Consider volatility, concentration, liquidity, geopolitical risk, margin, interest rate, and foreign exchange risks when investing in equities. That said, the stock market tends to reward well-established companies over the long run. If you're looking to follow a buy and hold strategy for an extended period, you will likely earn good returns.
Holding onto your planned investment strategy can remove any sentimental effect of your investments and instil discipline.
Golden Rule #3. Spread Your Money Across Assets
You may have come across this saying, "don't put all your eggs in one basket." This saying is particularly crucial when investing in the market. It points out the importance of diversification, which means spreading the amount you wish to invest across different assets, or even geographies, to mitigate the risk.
The first step to know how to invest in the stock market is to plan a diversified portfolio. Holding a diversified portfolio can help you balance out volatility since no particular asset could have an outsized influence. A diversified approach to your portfolio can ensure that even if the value of one of your investments falls, an increase or stability in the value of other investments, averages out the performance of your portfolio. Diversification is an investment risk management technique of allocating your money across different financial instruments to reduce exposure to any one particular asset.