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:
Risk
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.
Diversification
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.
Inflation
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.
Volatility
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
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:
Post a Comment