Investing in the Stock Market

Stock MatketOne of the preferable ways of investing your money is by buying stock. The reason why this has been a preferable way of investing for many is the low capital required to engage in trading in the stock market. Many people fear to venture into this market because of money lost in the bear market experienced in many stock markets of the world recently. This loss was occasioned by the speculative nature of most investors who believed that in the preceding bull market, prices would continue to increase perpetually which is a fallacy. To be successful in stock trading, one has to take many things into account.

Most respected experts in this field like the late professor Benjamin Graham emphasize that before investing, the potential investor should know the difference between investing and speculating in the stock market. A speculator in the market is an investor who buys a stock with the hope that its price will rise quickly within a short time and he can then dispose the stock off and make his money. On the other hand, an investor is someone who buys shares after doing a thorough analysis. This analysis involves finding the intrinsic value of the share and ascertaining that the investor’s capital will be safe. Getting the real value of a share will involve going through the specific company’s financial statements for a couple of years preferably 10 years. The financial statements that are of interest for this valuation are the Balance sheet, the Profit and Loss account and the funds flow statement. Due to the complexity of this analysis, Your Personal Financial Mentor will come in handy to help you with this. Alternatively there are several books available which can guide you on how to go about the analysis.

The investor needs to know how much risk they can tolerate. It is advisable that when one decides to invest in the stock market, they should split their portfolio into two i.e. one portfolio for stock and bonds. The reason for this is that studies have shown there is an inverse relationship between bonds and stocks. When bonds are performing well, stocks will most likely be performing poorly and vice versa. The risk the investor can tolerate will guide them in knowing how to split his capital between the two portfolios. If they are risk averse, they will invest more in bonds as compared to shares.

Lastly you need to diversify you stock portfolio. Don’t hold all your capital in one company’s share or all your stock in one particular sector. Diversify your stock portfolio preferably in different sectors since different sectors will perform differently at different times. This strategy will ensure that your capital is safe.

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June 12, 2013 Investing in the Stock Market