It is generally accepted that there is not a single rule without an exception in the stock market. However, the exciting world of stock investments does rely on some basic principles that successful entrepreneurs do not dispute. If you are looking to become a serious long-term investor and make a decent living out of this, then mastering the following tips along with common-sense rules will smoothen your path to success.
1. Avoid the “hot tip” trap
The idea that you got a “hot tip” from a friend, coworker or relative and you get rich overnight is only applicable in the movies. In the real world, the successful entrepreneurs don’t go after wild goose chases, but instead do their own research and analyze whether the investment is worth their hard-earned money. This is similar to gambling and because this approach implies playing with some pieces of information you received randomly, it IS bound to fail.
2. Don’t get alarmed too easily
Market and stock fluctuations are perfectly normal and you shouldn’t panic or get overly excited each time they experience short-term changes. Without denying that some investors can make some cash from these minor fluctuations, the earnings don’t even begin to compare with those of a long-term investor. Not to mention that the latter applies a completely different strategy over which he has more control. The important thing here is to look past the market’s momentary volatility and see the big picture.
3. The price-earnings ratio is not as important as you thought
While crucial in the stock investment market, the P/E ratio should not be the only criterion you base your decisions on. As a future successful long-term investor, you should know that this ratio should only be interpreted in conjunction with other analytical processes and always in a context. To put it simply, a high ratio doesn’t necessarily mean overvalue, while a low ratio doesn’t always indicate the undervalue of a security.
4. Stay away from penny stocks
A common misconception among starting investors, the idea that you could lose less if you buy penny stocks is false. Regardless of whether you invest in a security with $100 value per stock or in a $5 value, in both situations you are losing 100% of the investment. Furthermore, because of their low price, you are tempted to buy more. Besides, a company with a $100 stock will be more likely to have more constancy on the stock.
5. Don’t sit around waiting for rebounds
Even though they acknowledge that in order to make profits they have to sell precious investments, novice investors will usually hold onto certain stocks waiting for them to rebound. Recognizing that you made a bad investment could also play a crucial role in this faulty decision. A successful shareholder knows that if he doesn’t manage to sell on time then he risks the stocks sinking and becoming worthless. Therefore, if you don’t want to lose even more cash, swallow your pride and sell the stock that is not performing as well as you had expected.