Tips to Invest in Good Companies
Everyone is looking for an easy way to be rich and happy. Human nature dictates that our actions are geared towards finding some hidden key or knowledge that will guarantee riches at the end or a lottery winning ticket. Although there are people who get lucky from purchasing winning lottery tickets, it is not wise to rely on luck alone when you think of investing. Our rush to finding the quick way to succeed, we often overlook the most important aspect of investing; time and compounding interest.
Investing requires one to have a strategy and believing what a few lucky individuals who quadruple their common stock in a year can do is very devastating. Investment reviews often advise those seeking to amass a fortune to analyze financial risks and avoid them, giving money time to work for you, and investing more regularly.
Here are some tips to guide you looking to invest in a good company.
Have Long-Term Goals
The purpose of investment returns and knowing when you will get those returns is important. Before you decide which stock market you are interested in investing in, ask yourself questions, like when you will need the cash. Is it within six months, a year, or longer? What is the purpose of your savings? Is it for retirement or college? Are you looking to buy a home from your investment? Or you want to leave your beneficiaries a secure future.
When you understand when you will require the funds you invest, then you can be able to plan before investing. Let’s say you will require your investment funds returned after a few years, investing in the company’s stock is out of the question, because of the volatility of the stock market. You are better off investing somewhere else because stock markets don’t guarantee all the capital you invested will be available when you need it.
Use financial calculators, readily available on the internet, to know the amount of capital you will need. Depending on the amount you invest, you will be able to calculate the return on investment. Some financial calculators available on the internet include Bankrate, CNNMoney, MSN Money, Kiplinger, and TimeValue. Some stockbrokers have in-house financial calculators that help their clients gauge their investments.
Remember, growing your portfolio depends on:
- Capital Invested
- Amount of net annual return on your investment capital
- How long you invest or the number of years invested
Start saving as soon as possible, saving as much as you can, and depending on your risk philosophy, you will be able to receive the highest returns possible.
Know your Risk Tolerance
Understanding the amount of risk one can tolerate is an invaluable trait for investors. Risk tolerance is mainly affected by the levels of education, income, and wealth one possesses. Risk tolerance increases as levels of education, income, and wealth increase. However, risk tolerance slightly reduces with age. The older you get, the less likely you will be risk-tolerant. There isn’t a perfect system to determine risk tolerance because human nature varies. Psychologists attribute risk tolerance to the feelings one harbors when presented with a risk. For example, would you risk $50 to win $500? Or $500 to win $500?
Perception affects risk tolerance. How one perceives a certain aspect of investing is important. For example, your anxiety levels are likely to go down when making your first stock investment if you have access to more information about investing. When you understand how to buy and sell stocks, price changes affect the stock market, and how difficult or easy it is to liquidate an investment. Although the risk tolerance remains the same, a change in perception reduces the anxiety tension when investing.
Understanding your risk tolerance helps you avoid investments that will make you more anxious. Remember, don’t invest in something that will cause you sleepless nights. Fear is triggered by anxiety, which leads you to make emotional decisions rather than logical decisions. Investors who remain cool-headed and analyze their decisions during a financial crisis always come out on top.
Don’t use Leverage
Leverage means using borrowed money to fund your stock market strategy. Although there are banks and stock brokerage firms that can loan you money to purchase stocks, usually 50% of the purchase value, it’s advisable to think twice before taking up such a deal. On face value, the idea of leverage sounds good when the stock prices are moving up because you are able to make 300% of your investments after paying brokerage fees and commissions. However, should the stock prices fall, you end up making a 100% loss on your investment plus associated brokerage fees.
Leverage is a tool best left for those who have gained experience and confidence in their decision making. When starting to invest its best to limit the risks to ensure you profit over the long term.
Get help from a financial advisor
Financial advisors play an important role for those who are uncertain about particular investment opportunities. A good financial advisor will be a great resource in helping you avoid loss from your investment.
Conclusion
It’s important to prepare yourself to know what to look for in business because investing can excite, challenge, stress, and reward at the same time. When you manage your investment well and know the expected returns, in the long run, you can turn your first-time investment endeavors into potential life-changing opportunities.
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