Investment is a tricky business, especially when you don’t have much experience in it. Making the right investment is a key to know how to utilize your income and increasing your budget as well.
The first thing you need to know: what actually is investment? In economic vernacular, investing means to purchase an item which, in the future, would appreciate in value and provide the investor with additional income.
Secondly, whoever wishes to invest in a venture or stocks must know that fruitful investment is not a result of a linear equation. The patterns differ for every individual, with variables like disposable and investable income, personal and financial conditions, individual’s propensity to take risks, individual’s location and last, but not the least: the value of money being invested. Hence, it is imperative for you to fully recognize the type of investment you wish to make, be it stocks, bonds, or corporate ventures.
Basic Terms to Understand
Tips for Beginners
1. When you own a stock, you own a part of the company
When you decide to buy a certain percentage of stocks from a company, you become a part of that organization and are entitled to know its major decisions and strategies, as well as any information that might be crucial to you as a stakeholder.
2. Understand how stocks work
Stocks are volatile entities and their value is never fixed. The major determinants of a value of stock include the market conditions of the country, the firm’s performance in that period, and the annual inflation rate. When you buy a stock whose value is momentarily low, it is called “value investment”, and when you buy a stock whose value is very high at that time, it’s called “momentum investment”.
Another very important fact to be understood here is that stocks work two ways; as appreciable capital, and as dividend earners. Most people buy stocks to sell them in the future for a higher price and others invest in stocks and earn through dividends that firms pay annually in cash.
3. Understand risks associated with stocks and your risk tolerance
Risk is an inevitable function of investment. You need to be aware of the stocks’ risk profile: is it high with higher and spasmodic returns or low with small but sustainable returns. Your decision to invest in a particular stock also depends upon your “Risk Tolerance” behavior. If you’re risk-averse, you would opt for low-risk stocks and if risk-lover then your preference would be high-risk stocks.
4. Portfolio Investments
One of the very first rules of investment: Never put all of your eggs in one basket!
This leads us to the discussion for portfolio investments. A portfolio is grouping of different financial instruments e.g. stocks, bonds etc. A stock portfolio consists of a combination of stocks from different firms. Quite frequently, investors invest in a combination of high and low risk stocks to make a portfolio as this balances the risk out if return from one group of stocks is low.
5. Always seek for expert advice
To be a successful investor, it is necessary to understand the dynamics of any stock market. You may seek expert advice from either your broker or an independent financial adviser before you make any investment decisions.
6. Trust your instincts
Lastly, always trust your instincts when making an investment. Regardless of how much advice you seek or research you conduct; at the end of the day, only you are aware of the exact substance of your situation, and understanding what you require from your investment will help you earn from stocks.
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