The prospect of making money through investments in the stock market is an idea that excites every new investor, as well as those who believe that they can get rich in a short period. However, the probability that one can make quick returns, while continually engaging in trading stocks in a volatile equity market scenario is quite low.
An average investor would do much better if they pay heed to the advice of portfolio managers and experts on careful and calculated investing, rather than getting swayed by the greed to maximize their gains through their individual actions. By adhering to some basic tenets of investing, they can put a plan in place that can help them organize their investments and provide a structured financial plan that brings returns in the long term.
Here are some of the means to generate wealth at the marketplace:
1. Dividends
Whenever investments are made in the stocks of a company, the investor stands to gain from the company’s good performance. When profits are being made, the organizations often decide how they wish to share their profits with their shareholders. It is usually a partial sharing of profits, as they tend to save it for later, and use the additional resources on increasing production activity, service offerings, or expansion of operations. The dividend is usually what the company decides to give for every share you earn. Knowing the record of organizations and their profit spends can determine your investment decisions.
2. Diversification
This is one of the most obvious measures investors need to take, to be able to stay afloat in a market that is often unpredictable. Those with a higher risk appetite tend to cherry pick their investments as per the recent performance trends of a company’s stocks that were already expected to perform well. While the help of advisors may come in handy when making these decisions, it is highly unsustainable and doesn’t work for the vast majority of investors.
Following the famous adage ‘Do not put all your eggs in one basket’ can do investors a world of good. Ideally, putting your resources in various sectors instead of concentrating on a single industry can bring a much needed balance to a portfolio. Since the markets undergo severe economic upheavals, fluctuating investor sentiments and uncertainty, diversification neutralizes low performing stocks and better ones, thereby providing guaranteed returns.
3. Analyzing the firms you’re investing in
Learning the ins and outs, gaining subject knowledge about financial mechanisms and structures, understanding the average market trends can only get half the job done for you. Investors often make the mistake of equating sectoral trends, global economic outlook, and a company’s announcements as price determinants. What many do not recognize is that a lot rides also on the company’s internal dynamics. Understanding their cash flows, expenses, revenues over the years, and monetary decisions are a few among many aspects which need to be thoroughly researched if people are willing to make long-term investments. Investors will do better to take recommendations from their portfolio managers on such aspects, as it involves a deeper study.
4. Avoid speculative decision making
More often than not, people make gains and make choices that could be detrimental to continued returns, owing to a natural urge to follow market speculation and rumors. One of the key ways to generate wealth is also to know how to keep calm around unconfirmed news reports. When panic sets in due to unforeseen circumstances for a company, people tend to fall for group think, and end up behaving compulsively, either buying or selling important stock options. It is, therefore, necessary not to mismanage your portfolio in crisis times and let emotional decisions affect your financial health of your stocks.
5. Knowing how and when to sell
As mentioned, some might have an appetite for taking risks and a zeal for trading short term. While it could provide significant rewards, experts argue that it is more suitable for young investors who can bet on capital appreciation or lower prices after a fall in share value. These decisions are often derived from market fluctuations and not a deeper study of an industry or company’s long-term growth strategy. Even the returns are not guaranteed, as it is akin to gambling and depends more on investors’ luck rather than precision based market evaluation.
For those that are in for the long haul, short-term market fluctuations or price stability of stock options shouldn’t determine your purchasing or selling decisions. Keeping the large-cap investments in check, and mid-cap and small cap investments in smaller proportions, the selling should depend on the each individual option and not the entire macroeconomic scenario. This way, hasty decisions can be put at bay and you could gain from the maturity of your stocks.
Whatever the plan may be, wealth creation is often a pain-staking long drawn out process for those who are not in it for making a quick buck. Returns over stock options often take years and it demands patience and calm on behalf of the investor to receive guaranteed returns over time.