The prospect of serious wealth generation is surreptitiously foiled by inflation, which can be defined as a sort of malicious tax levied stealthily by the government. Fiat money is generated out of thin air and the amount of money increases in circulation. As the money supply grows, the dollars bid and compete for the goods and services even more resulting in the spiraling of the general prices. This relentless monetary inflation does hit the poor but the investors with sizable capital at their disposal are not effectually shattered.
For an investor, the investment capital is generated from savings. He needs to consume less than his earnings. But recurrent inflation does manage to pose a dire threat to this hard earned investment capital. As it fiercely erodes the purchasing power, it radically alters the ultimate return too. He has to keep an eye on the net gain of his purchasing power and it must always be positive.
It makes sense for the investor to place his money in the stock market where the company deals with commodities. They should concentrate more on the real returns, which means, inflation adjusted returns, instead of the usual nominal ones. The commodity investors know exactly the market curve of the key commodities like gold or oil which is traded in real terms. It secures their investment portfolio. But in a situation where the investor earns say 100% when there is a rise in the price level by 50%, the investor’s perceived 50% gain is but an illusion. The nominal numbers gathered over years are meaningless. The true gains are calculated on the raw purchasing power are considered relevant.
Inflation has a monumental effect on the stock investors who are desperate to multiply their scant and valued capital. When the market runs in the bear phase, inflation accelerates real losses and it also retards real gains during the bull phase. Since stock investment is not immune from the bane of inflation, only long term return, regardless of the market origin, in real terms, should be the only concern of the investor. He can beat the inflation by riding on the perpetual bull. A bull market is always existent somewhere. It has been observed that when the stocks happen to be in the bearish phase of their long cycle, the commodities are found to be in their bullish phase, and vice versa. The commodity markets actually tend to move totally out of phase with stocks.
Sometimes when the stock market reaches all time high, some investors are so buoyed up that they think the prices would continue to rise and never come down. This is a fallacious view, which is held mostly by the inexperienced stock investors. They, therefore, tend to buy the stocks even though the prices are rising. As is the nature of the volatile stock market, the prices of the stocks fall and the credulous buyers suffer losses.
So what is the tip for stock market investors in such circumstances?
The best course is to buy stocks when the prices are low and wait patiently for them to rise. Fix up a moderate and practical income target. For example, you may fix a target to make 10% profits on your investment.
Do not succumb to your greed thinking that the prices will continue to rise further and you will be able to make 50% or more on your investment. Always keep in mind the volatile nature of the stock.
A golden tip
A golden tip for stock market investors is to buy when every one else is selling and sell your stock when everybody is buying. Do not succumb to peer pressure. Do not run after the majority. Think out of the box. Do not consider yourself a fool for not joining the party that every body appears to be enjoying at the stock market.
Never invest in unknown penny stocks
Even if you cannot resist the temptation of buying when every body else too is buying, do not invest in unknown penny stocks. Do not try to follow the secret, insider’s hot tips that your friend’s knowledgeable friend may try to whisper in your ears.
Quite possibly the price of the penny stock might have tripled during the last fortnight but that was before your friend’s friend started to buy the stock. Chances are that the promoters of the company had started a buying spree for the said stock and spread rumors about the likelihood of the company being acquired by some foreign investor.
Future growth vs past performance
When you try to analyze the value of a stock before buying it, you must consider its chances of its future growth rather than relying on its past performance.
Past performance of any stock, even its promoters warn the investors in their ads, is no guarantee for its future performance. You may argue yourself into buying a stock because it has doubled in the past one year. Instead of gloating over its double growth, you should try to analyze the reasons for that ‘spectacular’ performance.
Could it have been the lack of serious competition? Could it have been the supply of raw materials at reduced costs just because the raw material suppliers had recently entered the market and wanted to popularize their product?
If you are satisfied with the reasons, go ahead and buy the stock of that company.
Allow time for your stock to grow
Allow some time for your stock to grow in terms of its market value. Do not buy a stock and expect its price to start rising from the next day. If you join a good company as an employee, do you expect your salary to be increased in one or two months? Moreover, the value of good stocks grows slowly yet surely. There generally are no spectacular quantum jumps. If there are any, they may have been manipulated and as an intelligent investor, you may be wary of buying such stocks.
Remember, if money could multiply in matter of days, everybody would invest in stock market and leave every other business. Growth of any asset takes its own time and the investor should cultivate the culture of patience. Ideally a minimum horizon of one year should be a good time.
Diversify your portfolio
‘Don’t put all your eggs in one basket’ is an age-old business advice and it stands good for all times. Even the best of companies may face hard times due to reasons beyond their control.
It is therefore recommended that you should diversify your investment portfolio among a number of good stocks. Diversification, however, does not mean that you should scatter you investment in scores of stocks. This may endanger your focus, as you may not be able to keep a track of the performance of each stock. They may add to your confusion.
Diversification does not only means dispersing your investment in various stocks; it also includes different investment plans such as IRAs, Education accounts, DRIPs, ETFs and so on.
Invest in stocks and build a strong financial backup
Stock traders, or you can call them, as stock investors are those who buy and sell shares to earn profit. Stock investing today is one of the most profitable options for business professionals as well as for individuals. Thanks to Internet and the technology that has brought a new revolution in the world. This has not only made communications easier, rather it has given a new meaning to the corporate world.
There was a time when only big business tycoons would invest in stocks. For individuals, it was beyond imagination. Some of the most obvious reasons were the flexible nature of the market shares; difficulty in handling brokers and lots more. With the advent of the Internet, the whole scenario has changed completely. Now, you can invest and manage your finance easily through the Internet. You even need not to do heavy paper works or meet brokers in person – simply click the mouse button and your work is done.
With online stock trading system, there has been a tremendous growth in stock traders. Many people are showing their interest in this sector and are gaining profits regularly. In the present scenario, no one is scared of the word stocks. This investment option provides maximum profit in minimum time frame. Due to volatile nature of the stock market, there are subtle risks involved, which can easily be tacked with some market research.
There are several points that stock traders should always keep in mind. These points are mentioned as follows:
Since, an online trading company is needed to open an account, it is very important to find one of the best industries for your investment. Do proper research, look for all major stock trading companies based on their previous records, terms and conditions and the commission rates, etc. An online broker, however, another major factor, determines your success in online stock trading. Since, they do help you in buying and selling of stocks, it is therefore necessary to choose the best broker. In addition, you should also keep an eye on the stock quotes and the new company shares that are available or being launched in the market. Also, look for different trading stock options that are available. For any investment plan, you can also discuss with online financial experts.
It is always said that there is no gain without taking risks, but stock trading provides maximum benefit with subtle risks, which can easily be eliminated. Give value to your money and invest in stocks. It is always better to have a sound knowledge of the market to avoid any sorts of difficulties. So, start browsing the Internet or ask your family members or relatives who are already involved in trading.
Initially, you can start with a small amount and can also look for day trading option. It is a type of trading system where you buy and sell shares the same day to avoid risks, if any. Once you gain profit, you can increase the investment fund. This is the simplest and logical approach one can apply in his investment plan.