Steps in Investing
May 16, 2008
Before you involved in any investing activities, you must ask yourself whether you are currently meeting the adequate necessities of life. This might include some cash for emergency needs. Another prerequisite that you must able to meet up is the protection against the losses from death, illness as well as disability. Once you can ensure that these entire requirements can be satisfied then you can start establishing your investment goals.
The investment goals are the objective that you want to achieve by investing in the stock market. Different investors will set different goals according to their needs. Some might want to accumulate their retirement fund or some might just want to enhance their current income. Some even want to have saving for their major expenditures.
For example, accumulating retirement fund might be one of the most important reasons for investing. These retirement funds plan might not only applicable to the retired people but it might be a goal for younger people. This is because it is more preferable to start to access your retirement needs early so that you can have more time to accumulate sufficient funds for meeting the needs in later stage. Some families might use the investment to save for their major expenditures. The most common major expenditures might be the down payment for car, home, and education or even for the capital to start a business.
After deciding on the investment goals, you should start to adopt an investment plan. This plan is very important because it will guidance for you towards investing. This plan will describe on how you will invest your funds. The investment plan will include the short term plan and the long term plan. You should specify the target date to achieve it and the amount of tolerable risk that you can accept. It is clear that the more specific you can plan your goals, the more likely that you will be able to move towards your goals nearer.
Next, you can start to determine what investment vehicles are available. For each investment vehicles, you should evaluate their potential risk and return. Additional information about the investment vehicles will be useful for selecting the investment vehicles that consistent with your goals. The most important step is to select the investment vehicles that can lead to successful investing.
Diversified portfolio can be use to achieve your investment goals. Diversification allowed you to include a number of investments that consistent with your goals. There is an age-old advice saying that “Don’t put all your eggs in one basket”. Diversification will help you to earn higher return or you will be exposed to less risk than if you just have one or two investments.
Lastly, you must consistently manage your portfolio. You must measure the expected return compare with the actual return of the portfolio. If the actual return is less than the expected return, then you might need to take corrective action. The most important is do not be too quick to unload an investment or to chase hot tips. You must make sure that you have a good reason to buy or to sell.
Understanding Investor Behavior in Stock Market
May 16, 2008
Psychological factors can actually explain why different investors behave in different ways which affect their investment decisions. Investors might actually overreact towards some information that they gained and under react towards others. One of the most common investor behaviors is overconfidence in their judgment towards the market. This actually happens when they actually underestimate the risk of the investment. The major mistake of all is when they are overconfidence towards the market; they tend to trade too much which will lead them to high transaction costs. The transaction costs might even exceed the returns that they gained.
The second behavior is the investor tends to have biased self- attribution which means that they will take all the credit for the returns that they received and they will blame others for their losses that they encountered. This kind of investors will usually support the information that favor their beliefs and they will underestimate or not considering the information that are against them. They usually see the failure to get the returns as the result of the factors that are beyond their control.
The third behavior is known as loss aversion. This behavior often happens to the investors that dislikes the losses much more than the gains. For example, when a person loss $200, the loss that he experience will have a bigger impact on him compare with when he is gaining $200. The investor will usually hang on to the losing stock hoping the price of the stock will bounce back. They will sell the gaining stock rather than the losing stock.
The fourth behavior will be representativeness. The investor will usually make strong conclusions from a very small sample. This means that they actually ignore or underestimate the effects of random chance. One of the examples is when a stock broker helps the investors to gain from the market for consecutive three months, the investor will assume that the stock broker will maintain his performance and continue to help him to earn the returns. But actually the investor overlooks a few matters in this case. Firstly, the investment period is only three months which is a very short time period. Secondly, the results of the stock broker might just be driven by random chance. The investor should analyze the investment results for a longer time period before making the judgment that they choose the right stock broker and they are investing at the right investment.
Another behavior that most investor might have is the belief perseverance. This actually means that the investor will just simply ignore the information that is against their existing belief. They will even avoiding themselves from finding any new information because they afraid that the new information is against their initial opinion. Once the investor has decided that they make the right choice, they will believe it even though there is evidence proving that their choice is wrong.
Basically, these are the few of the investor behaviors that explain their actions when dealing with the investment. Some investors might posses one of the behaviors but some of them might posses few of these behaviors at one time. Understand these behaviors will help the investors to react in the market efficiently.
Betting on the Stock Market: Penny Stocks
May 8, 2008
Betting on the stock market can be risky business, which is why many potential investors think they can make a lot of money with penny stocks. Unfortunately there are more and more investors finding that penny stocks are much more of a risk then they originally thought.
While it is very possible to make a very tidy profit with penny stocks it is also possible to take a huge loss.
Here are some tips for those wanting to invest in penny stocks.
The most important thing to remember when investing in penny stocks is that you should never even think about investing money that you cannot afford to be without.
You should not make any impulsive choices when you are investing in stocks. If you are just investing at random you are gambling not investing. You should make sure that you have done your research before making any solid decisions.
When investing in penny stocks you should be ready to get rid of your stocks on very short notice as it is very likely that these types of stocks can take a dive at a moments notice. Basically you need to keep a close eye on you stocks.
Have a solid trading plan in place before you start investing. Know what you want to buy and the right time to invest. You should also have a clear idea as to what point you want to cut your losses or take a profit.
Take great care in using the tips that are passed along to you. You want to take the time to figure out how reliable a tip is before you invest any money in the stock you are interested in.
You need to be sure to keep a certain amount to money in your trading account at all times. Most experts state that you should have between 5-10% left in your account.
This type of investing is not something that just anyone but if you stick to your clearly planned out directions you will be able to generate a great income for yourself.
