To achieve mastership in any business it is necessary to follow some basic rules. Investing is not an exception. The success of an investor largely depends on how much he or she adheres to some basic rules of this art. Today we will talk about the rules of the investments by successful investors, the observance of which will help beginners to avoid mistakes and make the investment process more efficient.
Define an investment strategy and stick to it
Unsystematic performance of operations in the stock market is a sure way to lose your funds. Before you start working in the securities market, you need to develop a plan to achieve your financial goal through investments. It is necessary to determine the investment horizon and the expected end result. After that, you need to choose the instruments that will allow you to achieve this. By answering these questions, you will be able to determine the most appropriate strategy. However, it is not enough to outline a plan of action; it is also necessary to adhere to it. Otherwise, there will be no sense in having a strategy.
Be open to new knowledge
Currently, investments are available not only for professional players on the exchange, but also for beginners. Novice investors can invest in mutual funds or entrust their assets to a professional trustee. But even in this case, it is necessary to have at least a general understanding of the basics of the stock market functioning. But you cannot become a successful investor by relying on others. Therefore, it is worthwhile to understand the nuances of investing on your own. Learn different strategies, deduce patterns, take an interest in the secrets of experienced traders and investors. In short, try to find out as much as possible about what you are doing. Read books about investing or blogs from successful investors, watch instructional videos, or sign up for courses. However, it should be borne in mind that not all information is useful. Therefore, you need to filter the information flow.
Invest only in what you understand
If you decide to invest in stocks, then you need to remember that stocks are shares of the company’s assets. And the value of its assets will depend on the success of the company. If you do not understand the activities of a particular issuer, then it is better to refuse to buy its shares. Otherwise, you will not be able to assess the potential of the company and the feasibility of investments. Well-known investor Peter Lynch once compared buying shares of a company, the type of activity of which the investor does not know, to playing poker without looking at the cards. You should not acquire the assets of a company whose activities you have a rather mediocre knowledge of. Even if everyone around says that investing in this shares is profitable. The investor must understand the specifics of the work of the company, the shareholder of which he or she intends to become, on his or her own.
Invest only free funds
If you decide to spend your last money on the purchase of shares, then this is rather irrational. It must be remembered that working on the stock exchange does not always bring you profit. You can both increase your investments and lose them. And no one can predict in advance what the outcome will be. Therefore, you need to invest only the amount with which you are ready to part in the event of an unfavorable outcome. Investment costs should not be the reason for a decline in the quality of life. You should not deny yourself everything just for the sake of investing money in securities.
Don’t overuse margin trading
Margin trading is the acquisition of assets using the borrowed funds of a broker. Using this tool, you can increase the size of the deposit several times and make larger transactions. This, accordingly, increases the potential profit. For example, a leverage of 1: 100 allows you to purchase assets worth a hundred times what you have. But this medal also has a downside. Your losses can also increase several times. There is even a danger of losing your deposit completely. In addition, the use of borrowed funds makes it difficult to objectively assess risks.
Don’t forget about diversification
Portfolio diversification is a basic rule of successful investors. Diversification allows you to reduce the risk of losses by including diversified instruments in the portfolio. In other words, if your investment portfolio has different types of assets, then there is a high probability that at the moment the value of some falls, the price of others will rise. Assets can be diversified in several ways. For example, instrumental diversification involves the inclusion of different asset classes in the portfolio. It would be more rational to purchase several different investment instruments than to invest all the money only in stocks or only in federal loan bonds. The point is that under the same conditions, different assets behave differently. And in case of losses on one of them, you will have the opportunity to compensate for them at the expense of others.
Don’t neglect analytics- rules of the investments
Investing without knowing the current market situation is like playing the lottery. By a happy coincidence, you can make a profitable investment at random, or you can invest money in absolutely unpromising instruments. To reduce the likelihood of unprofitable investments, it is necessary to analyze their feasibility. Therefore, before making an investment decision, it is necessary to conduct a thorough market analysis. You can use ready-made analytical materials or do it yourself. Most of the investment companies and brokers publish analytical reviews and even a selection of investment ideas for free. If you decide to conduct an analysis on your own, then for this you need to study the information about the selected issuer. Also, it will not be superfluous to analyze the state of the economic sector in which the company operates. Information about the economic indicators can be obtained from open statistical sources or specialized resources. The Economic Calendar service can also be your assistant in fundamental analysis. It is an aggregator of the most important news of the world economy. Access to this service is usually provided by brokers or investment marketplaces. For example, this opportunity can be used absolutely free of charge on the Bristol House Corporation or Zero Markets website.
Control your emotions- rules of the investments
The main enemy of an investor is impulsive decisions made under the influence of emotions. They are rarely successful. The main emotions that can prevent an investor from acting rationally are fear and greed. Under their influence, an investor can buy or sell assets at the most inopportune moment. Positive emotions can also influence the rationality of investment decisions. The joy of a successful deal and excessive self-confidence can also push you to rash steps. Experts recommend approaching investments with a cold heart and a sober mind. If you feel that you are overwhelmed with emotions, then it is better to refrain from making a deal. You will come back to this question later when you objectively assess the situation.
Don’t follow the herd instinct- rules of the investments
Famed investor Warren Buffett wrote, “Be afraid when others are greedy and be greedy when others are afraid.” The essence of this rule is the need to do the opposite of what the majority does. During the growth in the value of shares, there are many people who want to buy them, hoping that it will continue to grow. Conversely, when the stock price falls, most of the investors begin to get rid of them in order to reduce losses. However, Buffett recommends not succumbing to the mood of the crowd and acting the other way around. It will be much more profitable to sell stocks during a period of high demand in order to lock in profits. And the moment when the value of securities falls is the most suitable moment to replenish your investment portfolio.