There are very few markets in the world that are remotely as lucrative as the stock market. It would not be too inappropriate to label the stock market as the theatre of dreams. The nature of the stock market is such that it can help you reach your ultimate financial goals in life if you play your cards well.
However, if you are not in touch with the latest trends in the market and lack the ability to make use of the most effective strategies, you will end up having your dreams crushed and swept aside like dust.
Before you venture out into the stock market, it is imperative that you learn how to invest in the stock market. Without this knowledge, you put yourself in a very risky position.
A Volatile Atmosphere
Being able to invest in the stock market depends largely on the kind of business or the type of industry that you have targeted for yourself. Some people describe investing in stock as a form of art. You need to master this art in order to attain any kind of success in the stock market.
As you should be aware by now, the stock market is extremely volatile. It can make you a rich man in one day and a pauper on the next. Each investment decision you take and each tactical move you make must be calculated and well thought out.
Understanding the Business
Though intuition and instincts often play a major role, you are advised not to rely on your luck to get you across the line. The modern day stock investor knows the businesses he or she engages in inside out.
The more knowledge you acquire about the businesses that you get involved with or invest in, the higher are your chances of increasing your returns on investment.
How to Invest in the Stock Market?
Whenever you decide to invest in any kind of stock in the stock market, there are a few essential things that you must take into consideration. How you deal with these things will determine how much success you earn at the end of the day.
If you ignore these basic fundamentals of investing in the stock market, you will be derailed from the path of prosperity, and your future investment opportunities will dwindle. In other words, you must approach each investment with a strategic mentality.
The following is the list of factors that you need to focus on during every stage of your stock market investment endeavours.
1) Calculate the Profitability
Common sense states that investors should only pour their money into businesses which are bound to be profitable in the long run. This is why calculating the profitability of businesses that pique your interest in the stock market is a prerequisite to investment.
Do you want to invest in a business that you are a fan of? That’s great! You have the right to proceed with your investment by all means, but not before you come to a conclusion about how profitable the company will really be.
Checking the profitability is quite easy. All you have to do is assess the return on the equity, the return of the invested capital and last but not the least, the company’s profit margin. Taking into account the company’s profit margin is one thing that you should never ignore.
The return on equity is described as the rate at which you earn money from the shares that you own. When investing in the stock market, make sure that you always handpick those companies which have a return on equity greater than 15%. Anything below that will not bear fruit for you.
There is a simple way to calculate the return on equity; just divide the company’s net income by the equity of the shareholders. In order to find out the profit margin, analyze the company’s net income over the net sales.
2) Stay Clear of Big Debt Ratios
A company with huge debt ratios is a company which is bound for bankruptcy. Investing in such companies is a big NO. Stay as far away from such companies as you possibly can. Some of these companies with big debt rations have very high return on investments.
Do not let the impressive ROI fool you. If you want to find out about the company’s debt ratio, simply divide the company’s liabilities by the shareholder’s equity.
3) Invest in Long Term Shares
Businesses that have long term shares are worth investing in. You can enjoy much more security when you invest in companies that possess a strong long term hold. Investing in the stock market is all about seeing the big picture and having a vision for the future.
Fight off the temptations to enjoy short term benefits. These often lead to the downfall of even the most successful of investors.
4) Contribute to the Business
The thumb rule of investing in the stock market is learning about the business and participating in its long term success. As mentioned before, the more knowledge you have about the businesses that you are buying shares of, the better will be your chances of earning hefty returns on investment.
Study the business thoroughly and conduct as much research on the sales, the history, the mission, the vision and the organizational structure of the business. If possible, get to know the executives personally and assess their capabilities and potential.
When you have good knowledge of the business, you can actively contribute to its growth and development. Once you understand the ins and outs of the business, you can analyze the markets and know exactly where the business is heading in the next decade or so.
5) Have Realist Investment Expectations
When you are investing in the stock market, keep your feet on the ground. In other words, have realistic ambitions and expectations. Do not aim to overachieve and pile up more profits than everybody else.
Work towards creating a steady flow of returns. Try to mould yourself into a visionary, instead of being a money maker. Expecting only profits will ruin your investment culture.