Tips to invest in Stock Market
Last week we discussed about how you could begin investing in
Companies in the primary market as well as in Initial Public Offerings (IPOs).
The Stock Market has the ability to outperform any other investment
asset class in the longer term.
Eventhough the benefits may fluctuate in the short term, in the
longer term stocks have been the most beneficial investment.
A person can engage in stock market investments as a long term or
short term investment.
In this article we will discuss some tips to invest in the right way
with the objective of creating wealth in the secondary market through
the stock market.
Long-Term Investing
Maintaining a diversified portfolio as in any other risk management
technique, when investing in the stock market, it is best that you
invest in diverse types of assets. For instance, make sure you do not
invest all your money in one single sector. You can spread your
investment across different sectors.
The companies listed on the Colombo Stock Exchange (CSE) are divided
into 20 sectors comprising telecom, banking, finance and insurance,
beverage food and tobacco, hotels and travels and Manufacturing.
You need to ensure that you understand each company's business model
and the exposure to business and financial risk before making an
investment decision.
In depth knowledge and access to research data pertaining to sector
dynamics, competition, key success factors, driving forces, government
policies, global trends will no doubt help you to better understand the
future direction of the respective industries/sectors.
Your investments should thus be divided among the sectors that will
offer relatively stronger growth prospects.
Another stage of diversification would be that you can spread your
money among various classes of assets such as in Treasury bills, land
and gold rather than investing all your money in stocks.
The allocation of funds into different asset classes could be done at
your discretion.
If you are a risk taker then increase your exposure to equity with an
asset mix of 70:30.
If you are risk averse, then you could allocate more funds into fixed
income assets whilst channelling a smaller percentage into equity (stock
market).
Timing of Investment
Once you've decided what your investment portfolio should look like,
you can take the initial steps to invest.
Approach a suitable stockbroker and open a Central Depository System
CDS account for him/herself via the stockbroker.
At the time of initial investment, it is advisable not to invest all
your money at once. You should invest your money gradually in the market
to minimise any market timing risk.
Once you purchase shares of companies you are interested in, review
them at least once a week and compare them with the initial investment.
Sustaining Your Portfolio
Review the portfolio regularly and add any securities in the areas in
which you want to increase exposure. These additional securities can
either expand the number of securities you hold or be added to existing
holdings.
By maintaining your portfolio as such, you would realise in a couple
of years that it has become a substantial investment to fund your
retirement, pay for a second home, or meet whatever goals you set when
you started your investing journey.
Presented above are a few tips for investors on how to benefit from
stock market investing in the longer term.
This section below would focus on how an investor can succeed in the
stock market through short term trading.
Short Term Trading
Short term trading can be a high risk, high return option.
You should clearly understand the risks and rewards of each
transaction if attempting to profit in the short term.
You should also possess the skills of identifying best deals and
safeguard yourself from unexpected losses.
Most of us assume that by following the events of the market at the
end of the day, we would be sufficiently updated to make good decisions
in the market.
Yet what we don't realize is that by the time we find out the
information, the market has already responded to these facts and events.
Thus you should be mindful of the following tips suggested by experts
in the field, to make a better decision.
Watch the Moving Averages
A moving average is the average price of a stock over a specific
period of time.
The most common time frames are 15, 20, 30, 50, 100 and 200 days.
The overall idea is to show whether a stock is moving upward or
downward. Generally, a good candidate will have an increasing moving
average that is sloping upward.
If you are looking for a good short term investment, you want to find
an area where the moving average is flattening out or declining.
Understand Overall Cycles or Patterns
Usually the markets trade in cycles, which makes it important to
watch the calendar at particular times. Cycles can be used to traders'
advantage to determine good times to enter into long or short positions.
Get a Sense of Market Trends
If the trend is negative, you might consider doing very little
buying. If the trend is positive, you may want to consider buying more.
The reason for this is that when the overall market trend is against
you, the odds of having a successful trade drops even more.
(Courtesy CSE)
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