August.22.11Personal Finance
value investing
Money Matters with Nimi
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When it comes to playing the stock market, women all over the world have lagged behind men. Too many women remain hesitant about investing in the stock market Because of their strong aversion to risk and the fear of loss, they tend to be more inclined to put all their money in short term investments and have therefore missed out on many wealth-building opportunities.

The Stock Market

The stock market is really like any other market place – it facilitates the exchange of stocks between willing buyers and willing sellers driven by supply and demand on the stock exchange. Where the demand is high, share prices rise and where demand is low, share prices fall.

Buying and selling shares

You normally buy and sell shares through stockbrokers who usually offer three main types of service; advisory, discretionary and execution-only. Through the advisory service you are entitled to be given advice on what to buy or sell and thereafter you make your decision. The discretionary service is ideal for those who lack the time or expertise to make their own investment choices and totally rely upon experts to make decisions for them. For the experienced investor however, execution-only services are adequate where the investor directs the stockbroker as to what to buy or sell and at what price.

For most investors, mutual funds are the easiest way to access the stock market. A mutual fund pools investor’s funds and manages them in stocks, bonds, money market instruments, etc. The benefits of mutual fund ownership include the wide variety of investment types to choose from, professional management, and having a diversified portfolio.

Ten Tips for investing in the stock market

How much should you invest in the stock market? How can you make sure you don’t lose your money? How do you select the “right� stocks? These are questions that investors always ask yet there is no right answer. It is true that there are no foolproof rules that successful investors follow but below are ten tips that should help you along your way.

1. Start early

It is important to start investing at an early age. Young people have the advantage of age on their side and can afford to hold on to investments without being in a hurry to sell. This means that they will be able to ride the inevitable volatility with the prospect of good returns over the long term.

2. Stick to your goal

Before deciding if a particular type of investment is the right one for you, consider whether you will need the money in the short, medium or long term.

Once you set your goal, stick to it and don’t be tempted to act on impulse. The stock market will go up, and it will go down. Successful players are able to ride the wave and realize the greatest returns on their investments as they remain focused on their goals which may include, owning their dream home and giving their children the best possible education.

3. Get Professional Help

If you are a new investor, it pays to get help. Professionals have the expertise and an enormous amount of information with which they can make well-informed decisions and guide you appropriately. Once you are used to the market, you can become more involved.

4. Invest for the long term.

It is important to have a long-term perspective when you invest in the stock market. Historically, stocks have generally outperformed other investment classes over the long term. However, in the short term, the market can be unpredictable so trying to make day-to-day decisions is really only for your stockbroker or the truly experienced investor.

It is impossible to predict accurately what the stock market will do tomorrow. Sometimes the stock market makes sense and at other times no one can really explain why it is acting in a certain way. Many factors come to bear as to whether the market will go up or down, such as market trends and economic forecasts, the political situation, investor perception, emotions, greed and fear.

5. Invest only what you can afford to lose

It is important to be aware of the risk that goes with stock market investing. Stock market investments are not guaranteed. This means that although you are likely to make money over the long term, you can lose money. If you can’t bear to take much risk and would be devastated by a loss, its best for you to steer clear and invest in guaranteed investments such as fixed deposits, Certificates of Deposit, or Commercial Papers.

Bear in mind however, that when it comes to money, sometimes playing it too safe isn’t necessarily the winning formula. If you invest all your money in guaranteed investments, your investments are not going to keep up with inflation. By being better informed you are better able to understand your own risk tolerance level.

6. Don’t jump on the bandwagon

Many new investors are enticed by short-term profits. The “get in, get out and make a killing” approach comes with much risk. It is true that many investors make lots of money by actively trading in the short term but be careful.
Stock markets usually move long before any news becomes clear. If you jump into the market after many investors have already acted it may be too late and you would have missed the boat. If possible, it is best to be positioned before the main directional change takes place, and this takes some understanding of the market. When you make an investment, you should know your reasons for doing so. Relying upon every rumour or tit bit from your brother or neighbour is gambling.

7. Buy low-sell high.

This seems so obvious but from my experience many investors often do the exact opposite! They jump on the bandwagon and invest when the market is already rallying. Once it reverses they panic and sell. If anything, this should be considered an opportunity to invest in strong companies at bargain prices. A market decline is not the time to panic and sell, but rather to take advantage of the lower prices.

8. Invest regularly

Allocate a part of your investments in a systematic investment plan. Through cost averaging you buy shares on a regular basis, say monthly, or quarterly. This means that one buys stocks when the market prices are low as well as when they are high. Over the long term you end up buying your shares at a lower average cost.

9. Diversify

Do not put all your eggs in one basket. When it comes to buying shares, diversification is essential. Instead of investing all your money in just one or two companies, its best to diversify by buying shares in different companies and sectors. Any losses caused by the downslide in one sector may be covered by a rise in another, as it is unlikely that all segments will perform in exactly the same way and decline together. Investing in a mutual fund ensures diversification so many investors opt for this option.

It is also wise to diversify amongst other asset classes such as money market instruments, or real estate. That way, in a stock market decline, all your assets won’t be exposed to the potential losses this can bring.

10. Build your knowledge

One of the best investments you can make in yourself is to take the time and trouble to improve your knowledge of investing. There is a plethora of information and research by professional analysts and experts, which will be a good guide. Investment seminars are also available that can develop you and point you in the right direction. Resolve to take out fifteen minutes each day to educate yourself. You will be surprised to see how much you can learn in a year.

Investing is a journey towards achieving your goals. If you keep your goals in mind and work towards your master plan you wont be easily derailed by market hype and volatility. Your own unique circumstances should ultimately determine how much, how and when you should invest.

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