Investing Basics - 3 Important Guidelines To Follow

Given the volatility in today's world, people who do not take risks are risk-takers. To survive in such troubled times, it is definitely vital that people know some basics on how to invest. This will help them filter out bad financial advice and allow them to minimize losses while maximizing their profits. In the course of investing, I believe many of you will have an affinity with charts as they are technical indicators most investors use to determine their next move. Charts are important because they reflect price movements for some investments and sometimes can provide hints to determine the next price movement an investor can exploit to profit from. Thus, whenever you see an extremely sharp rise or dip on charts, it is necessary that you analyze why it happened and take action to buy or sell when the appropriate price comes. For investors currently in midst of a bull or bear market, it is imperative that you investigate thoroughly the rationale why the bull or bear exists. Do note that this is different from the sharp rise or dip written above because it applies for the short-term traders (who makes quick profits) whereas the investigation I just mentioned is for the long-term investor who invests for value. Thus, the research involved would be different. For the value investor, to investigate the reason for the bull or bear market, they should take an approach towards finding out factors like rising costs of production. For traders, the information required would be like the hike in interest rates for the month. Though both groups are investors, they are very distinctly different from each other in many aspects and I hope you take a good note of this. The next guideline to follow is that if you see even common people recommending you a particular investment, be ready to sell if you hold them. Usually, such phenomenons occur when there is a state of mass hysteria in the market. For example, during the dot-com bubble of the 1990s, many common folks recommended investing in technology stocks though there were no earnings to support the high prices they had. Some of the P/E ratios for the stocks were at around 100, meaning that it would take 100 years for the earnings to support the current stock price. Here, people were hoping for a greater fool to buy the stock at a higher price from them when they sell. Another clear example of this would be the recommendation of buying real estate near the recent subprime crisis when prices were at an all-time high. Eventually, all bubbles end and latecomers are the people who get wiped out. Thus, whenever you see common folks giving you investment advice, be very cautious and careful. The last guideline I have for you would be the that history often repeats. This is proven by the Barry Bannister's study showing that stocks and commodities have alternate leadership in 18-year cycles. Since every 18 years mark the turn of a bull into a bear, it should be noted that we as investors should follow the law of Nature and move along with it. The explanation I can offer for this would be that for the stock market to be a bull, the commodities market has to be a bear to lower the production costs (for example, the cost of raw materials) for the listed companies. This would boost profits and generate more confidence in the stock, thus pushing the price higher. If it happens on a large scale, the stock market will usher in the bull. However, as stock prices rise, listed companies have to find ways to sustain their earnings to support the high prices of their stock. To do so, they have to sell more and thus demand for commodities rise. The increased bidding for commodities will increase prices and this leads to a bull in the commodities market. Meanwhile, production costs for the listed companies will be increased, reducing net earnings per unit of product. If widespread, the bear for the stock market arrives. To conclude, I would like to end with a message useful for you: Almost every time you stray away from the herd, you make more money. Wandering away from the action is the way to find new action! The site uses cookies. They allow us to recognize you and get information about your user experience.By continuing to browse the site, I agree to the use of cookies by the site owner in accordance with Cookie policy