Most market players make investments based on their own experiences and understanding. In a lot of ways, investing is a lot like gambling. And like gambling, investing also has fundamental rules. No one may be able to predict how a market or a particular investment will perform on a given day but you will have a higher chance of success if you know the basics rules of investment.
These five are just some of the concepts that you might believe you already understand but do not:
Every investor understands that all forms of investment comes with associated risk. For instance, in the stock market, a lot of people tend to believe they are safe from risk as long as stock prices don’t go up. On the contrary, stock prices are not the only thing determining factor for the value of their investment. Stocks can in fact lose value due to other reasons, such as political and economic factors. If you invest in a foreign currency, changes in the foreign exchange rate may also affect how your stocks are doing.
Stock market investors may believe that buying stocks across different industries diversifies their portfolio. This is not true. The investment portfolio is in fact, not truly diversified because all investments are placed in just one vehicle—stocks. A truly diversified portfolio includes not just stocks but also other types such as bonds, savings, ETFs, mutual funds, and real estate. Diversification may also mean making investments in other countries.
Do not make the mistake of thinking that inflation rates only affect consumer prices. Inflation can also have an impact on your investments. For example, if one of your investments gets a 5% return, but the current inflation rate in your country is 7%, then there wouldn’t be much cause for celebration because this only means that the value of your investment has fallen despite having recorded a little growth. Investments must beat the inflation rate to be considered profitable.
Wikipedia defines volatility as “a measure of variation of price of a financial instrument.” You may see volatility as something negative in investments like in stocks, and it can be—if your risk appetite is low. However, volatility is not always a bad thing. You can take advantage of a volatile market to buy into a stock when prices get low. Keep in mind though, that if you choose to invest in a highly volatile stock, you need to constantly monitor this investment and be a more active trader.
Savings can actually be crucial part of your overall investment strategy. While it’s tempting to put all of your money on a lucrative investment, a good investor must still know how to save. In fact, before you focus on serious investments, it is wise to open a savings account and just let your money earn interest. Interest on your account may not earn a lot but at least your money is not exposed to risk. It also helps that the funds in a savings account remain liquid so you can access it if a good investment opportunity comes up.
Investing is not for everybody. It takes a certain aptitude for business and economics for someone to perform well and succeed. Even experienced investors are still prone to losses and failures, because of the volatile nature of most investments. But as long as you understand the fundamentals of investing—and exercise persistence and tenacity—it won’t be long before you can start getting the hang of it.
The above article has posted by Amy Lewis, owner of the finance corner. For more details about Amy you can visit her social media profiles in below mentioned urls: