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The Stock Market has the ability to outperform any other investment asset class in the longer term.
Even though the benefits may fluctuate in the short term, in the longer term stocks have been the most beneficial investment.
A person can engage in stock market investments as a long term or short term investment.
In this article we will discuss some tips to invest in the right way with the objective of creating wealth in the secondary market through the stock market.
Long-Term Investing
Maintaining a diversified portfolio as in any other risk management technique, when investing in the stock market, it is best that you invest in diverse types of assets. For instance, make sure you do not invest all your money in one single sector. You can spread your investment across different sectors.
The companies listed on the Colombo Stock Exchange (CSE) are divided into 20 sectors comprising telecommunication, banking, finance and insurance, beverage food and tobacco, hotels and travels and Manufacturing.
You need to ensure that you understand each company's business model and the exposure to business and financial risk before making an investment decision.
In depth knowledge and access to research data pertaining to sector dynamics, competition, key success factors, driving forces, government policies, global trends will no doubt help you to better understand the future direction of the respective industries/sectors.
Your investments should thus be divided among the sectors that will offer relatively stronger growth prospects.
Another stage of diversification would be that you can spread your money among various classes of assets such as in Treasury bills, land and gold rather than investing all your money in stocks.
The allocation of funds into different asset classes could be done at your discretion.
If you are a risk taker then increase your exposure to equity with an asset mix of 70:30.
If you are risk averse, then you could allocate more funds into fixed income assets whilst channelling a smaller percentage into equity (stock market).
Timing of Investment
Once you've decided what your investment portfolio should look like, you can take the initial steps to invest.
Approach a suitable stockbroker and open a Central Depository System CDS account for him/herself via the stockbroker.
At the time of initial investment, it is advisable not to invest all your money at once. You should invest your money gradually in the market to minimize any market timing risk.
Once you purchase shares of companies you are interested in, review them at least once a week and compare them with the initial investment.
Sustaining Your Portfolio
Review the portfolio regularly and add any securities in the areas in which you want to increase exposure. These additional securities can either expand the number of securities you hold or be added to existing holdings.
By maintaining your portfolio as such, you would realize in a couple of years that it has become a substantial investment to fund your retirement, pay for a second home, or meet whatever goals you set when you started your investing journey.
Presented above are a few tips for investors on how to benefit from stock market investing in the longer term.
This section below would focus on how an investor can succeed in the stock market through short term trading.
Short Term Trading
Short term trading can be a high risk, high return option.
You should clearly understand the risks and rewards of each transaction if attempting to profit in the short term.
You should also possess the skills of identifying best deals and safeguard yourself from unexpected losses.
Most of us assume that by following the events of the market at the end of the day, we would be sufficiently updated to make good decisions in the market.
Yet what we don't realize is that by the time we find out the information, the market has already responded to these facts and events.
Thus you should be mindful of the following tips suggested by experts in the field, to make a better decision.
Watch the Moving Averages
A moving average is the average price of a stock over a specific period of time.
The most common time frames are 15, 20, 30, 50, 100 and 200 days.
The overall idea is to show whether a stock is moving upward or downward. Generally, a good candidate will have an increasing moving average that is sloping upward.
If you are looking for a good short term investment, you want to find an area where the moving average is flattening out or declining.
Understand Overall Cycles or Patterns
Usually the markets trade in cycles, which makes it important to watch the calendar at particular times. Cycles can be used to traders' advantage to determine good times to enter into long or short positions.
Get a Sense of Market Trends
If the trend is negative, you might consider doing very little buying. If the trend is positive, you may want to consider buying more. The reason for this is that when the overall market trend is against you, the odds of having a successful trade drops even more.
(Courtesy CSE)
