This article will help stock market beginners understand how the stock market works and how wealth is created here.
Before starting to invest in the stock market, an investor should have the right mindset & a basic understanding of wealth is created here.
If you understand & implement these 5 points while you investing life or career you will end up better of, than the majority of humans.
Do you want to create or earn massive wealth?
1.Long term approach
Investing is a long-term game & a stock market is a compounding machine.
One needs to understand that shares are part ownership in a business. When the earnings & profits increase the share price of the company increases.
Just like Rome was not built in a day a business cannot be set up or start earning huge profits in a day.
It takes time & a lot of effort to build a business. For Eg:- Amazon.com took 23 years to breakeven.
For investors to achieve huge returns it requires a lot of patience. Patience is an important essence of long term wealth creation in stock markets.
2.Margin or debt.
Margin and debt mean taking out loans to investing in stocks.
Rome was not built in a day but Hiroshima & Nagasaki were destroyed in a day.
Rick Guerin was a partner of Warren Buffett and Charlie Munger in Berkshire Hathaway Ltd and also run an investment firm.
He suffered a 62% cumulative loss in the period 1973 to 1974 due to a high level of leverage. Rick had to sell Berkshire Hathaway Ltd shares for $40 dollars which are now worth $300000.
This happened just because of leverage not bad stock picking.
Many of the stock Rick held during this time period were also found in the portfolios of Buffett and Munger.
So stay away from debt or margin come what may.
Read Also: Mr. Market & his madness.
3.Invest, don’t gamble.
The stock market came into existence because the business owner’s needed funds for expansion & to reduce bankruptcy risk. As they otherwise would have borrowed money as a loan for fixed interest rates.
Investing can help you achieve your financial goals if you have a long term approach. As many studies have already proved that a longer holding period lowers the risk, which can be achieved through investing only.
“An investment operation is one which, upon thorough analysis, promises safety of principal & an adequate return. Operations not meeting these requirements are speculative”Benjamin Graham wrote in his book The Intelligent Investor.
4.Learn the language of business – Accounting.
Before running we need to learn how to walk. Right?
In the same way, learning book-keeping is an important part of stock market investing.
Accounting is the language of business. Companies all around the world communicate with their investors in the language of accounting.
An investor should have a basic understanding of how companies communicate and currently doing.
Learning bookkeeping is also important so as to understand the wrongdoing of a company like frauds, misappropriation of cash, etc.
As it is said
“Number Don’t lie”
5.Risk Appetite for the stock market beginners
Risk Appetite means how much risk an investor is ready to achieve its financial objectives. The risk here means permanent capital loss.
An investor before entering the market should know that he can lose a lot of money even in a day if the company he has invested in goes bankrupt or for any other reason.
So before investing an investor should know his financial goals like retirement, children’s education, a dream vacation, etc. Investing according to these goals is important.
1. A person in his 50’s should not invest in a small-cap or mid-cap stock for his retirement in the ’60s.
2.Parents can start investing when a child is born for his college education in mid or small caps mutual funds as the holding period is long enough.