Investing is a simple thing to do, right? Wrong.
If you have ever invested in anything, you might know that it is the hardest and most uncertain thing to do. Many people invest their money to accumulate wealth but lose all their money instead. Also, people fall prey to Ponzi schemes to double their money overnight and end up losing all their investments.
Today, when 52 per cent of the U.S population is investing their money in some stocks, it is high time we learn about it.
But before delving into the golden rules of investing, let’s define them first.
What is Investing?
Investing is committing your money to earn a financial return. That is putting your existing money to work to make more money for you. Investing is usually done to achieve financial goals which otherwise cannot be achieved.
Notwithstanding the fact of where you invest, you essentially give your money to a company, government, or any other entity that provides more money in return. One best way to learn investing is by learning from the knowledge of those who have done it successfully and are doing it regularly now too.
If you do not learn it, your chances of success get thinner. And probably that is why you are here: to learn investing 101. So, here are the golden rules that you must learn before stepping into investing.
Investing 101: Golden Rules Every Investor Must Know
Value of an asset is only determined by what it will generate in the future
Before investing, make sure to check whether your asset will keep making money for you in the future or not. The amount and time interval of that income will tell the exact worth of that asset. If it is something that offers significant cash and that too in a shorter time, the asset is very valuable. However, if it is a type of asset which either generates cash after a very long time or deteriorates as time pass, it is riskier.
Here are a few key takeaways from expert investors to determine asset value:
- An asset’s earnings in the past do not guarantee its earnings in the future
- If an asset stops earning at a point in the future, the asset has no financial value today
- If the future earnings of an asset cannot be determined, its worth is also unknown
- The cash flow or spending on the asset must be ruled out when calculating profit and net worth
Buying a share of stock is buying a stake in the underlying business
Remember, the stock market is not a fixed-return type of investment. It can make or break your investment portfolio no matter how carefully you invest in it. You can understand it by the example of an underlying business. Like a business, where we are uncertain whether it will take off or be grounded, the stock is also unpredictable.
However, you can minimize your chances of loss and maximize your chances of growth. For this, you need to invest in indexes and not directly in stocks. This is because indexing averages both the loss and profit of all the listed stocks and returns the result to you. So, if you are a non-professional investor, consider investing it in indexes.
A good investment is made on intelligent guesses
It is important to mention here that no investment is secure. The sword of risk always hangs on the head of your money, but with intelligent guesses, you can minimize the risk. If an asset is only available on mere speculations and not calculations, the asset is riskier and must be avoided.
To make an educated guess about any asset, you can take horse betting as an example. Before betting on any horse, the bet maker sees the record of that horse, its present condition, and the status of the competition. This is called an educated guess and has a greater chance of success than the speculative leap in the dark.
Invest at a time when stock prices are low
Some gurus will always tell you to invest at a time when the market is performing well and when everyone is making money. But remember, this is not the best time for you to invest, as the share values are higher now. Even if you buy, you will also sell it at the same price in the future.
In contrast, if you invest when the market is not performing, and share values are low, you get more stocks at the same price and can get a higher return when the market redeems.
To conclude, know that everyone can be a successful investor. It only takes patience and an intellectual understanding of the investing terms. If you have it, you can crack the investing nut easily.