With all the hullabaloo about speculation, an amateur investor may naturally assume that Wall Street is strictly for gamblers. This is a great pity, because probably a long-term investor can get better results in the stock market than elsewhere, provided he follows a few fairly simple rules. Also, it would help in the public understanding of how free enterprise, and especially big business, is owned, if more of our non-gambling citizens participated in owning corporate stocks.
Let us compare stockholders with motor-vehicle drivers. Every year automobiles, trucks, and their drivers cause a fantastic number of deaths and personal injuries, not to mention property damage. The great majority of drivers are careful at least nearly all of the time! Most accidents are caused by a comparatively small number of careless and reckless drivers. A cautious citizen, knowing that he or his family may be the victims of the next accident, could conceivably protect himself by refusing to use motor highways. But the trouble is that motor vehicles save us so much time and energy, and give us so much pleasure when used sanely, that we know their good qualities far outweigh the bad. So we continue to drive, and to hope that the wild drivers will behave, while in our vicinity! In Wall Street, the speculators, in spite of the commotion they raise, are only part of the community, the same as the reckless drivers on the highways. And in contrast to the highway problem, a cautious amateur can invest in such a manner that he runs low risk of having his finances wrecked by the gambler mindset.
Traditionally, being an equity owner of business involves serious risk, sometimes complete failure. An investor, knowing the instances of bad results in small business ventures, may assume that in buying corporate stock he must expect to run somewhat comparable risks, and so he makes no attempt to learn how to reduce the danger. Apparently a great many shareholders have attitudes more or less like this. They may not want to gamble, but they don't bother even to inquire how Wall Street investment risks could be lowered. A serious market investor, wanting to avoid gambling in stock investments, must do some serious investing thoughts. The 8 main ideas for reducing the risks are mentioned below:
1. Avoid Investment Egotism. Realizing that there are several million stockholders in this country, admit to yourself that probably quite a lot of these people are just as smart as you are. Be satisfied with results a little better than average. Don't let your ego runs for 50% if the market average is performing 25%.
2. Avoid Prophets, especially the positive ones. The stock market reflects events and rumors from all over the world, and no man or any group of men can be sure of what is going to happen, or when. Some prophets are paid to write for some companies. They do not always deliver genuine opinion. I would refer to their comments and analysis, but rely on your judgment of market sentiment and stock fundamentals for investing decision.
3. Don't Borrow on Stock. Market price might drop and wipe you out. You do not want excessive interests to incur, and in the worst case, you do not want a lender's call back that affects your key assets like home or business ownerships. Maintenance of your personal and family's stability is a priority over stock investment.
4. Diversify your Stock Portfolio. Don't put all of your capital into one investment, or into just one type. Put part of your savings into common stock, the other part into fixed-price items cashable at any time, to preserve the dollar value. Own stocks in a good number of companies. The larger the number, the better the chance of getting average results. And for real diversification, the companies should be in several different industries. For instance, pick a steel manufacturer, an oil refiner, an electric-power company, an electronics manufacturer, an IT firm, a department-store chain, and so on.
5. Check stock Marketability. Before you buy, make sure that you can sell or redeem it easily and promptly. Stocks of big blue-chip corporations like Microsoft, GE, Google are more liquid and hence easier to be transacted in the market.
6. Choose Skilled Management team. Find out how to pick a stock with great management level of proven competence. Warren Buffett investigates into a company's leadership, credibility in its past performance delivery and the management's capability to propel further growth.
7. Time your Buying and Selling. Adopt rules on timing of your buying and selling stock. The time of action is a major risk in owning stock. After you buy, maybe the price drops; and after you sell, perhaps the price rises. Maintain a standard ratio between the current market value of your stock and your reserve. Also, buy and sell stock only in small installments, never moving a large portion of your capital within a short time. By spreading installments over many months, you obtain a fair average price per share. Patience has a big factor in success of stock investments. If you could sit and wait for the correction times to buy quality stocks, you are on your way to success!
8. Review periodically. Don't put stock away and forget it. At regular intervals, as for example after the close of each week, check back to see how well your stock has performed during the past few weeks or months in comparison to other stocks you might buy.
Can you afford Investment Risks? Drive Carefully! A reader's reaction to these ways of reducing risk may be: "Those are nice ideas, provided a man has considerable capital, but they are impractical with only small savings. A broker's charge is a high percentage on a small transaction, so a little investor cannot afford to make a large number of small purchases and sales. Also, the fee for first-class advice is too high for an ordinary investor to pay." This reader's complaint is valid, provided he insists on owning stock in the customary old way-that is, being a direct owner of stock in corporations engaged in manufacturing, mining, transportation, retailing, and so on. But the mutual funds, the open-end type of investment companies, make it quite practical for a man with only small savings to use every one of the ideas listed above for lowering the risk of owning stock. An investor learns and matures through time. I urge you to take the above 8 ideas, study deeper into them for applications. Risk avoiding tips given here need to be internalized before positive results could happen. I wish you well in your stock investment venture!
Also, read and learn about the benefits of dividend paying stocks.
