In this article you will find information about five investing rules you should not forget.
You will also find information about when you should start investing, how much money should you invest, the importance of investment goals,and the associated investment risk.
The Basic Investing Rules
It is very easy to jump into stock investment bandwagon following others to make money, but without strong investment philosophy straight from beginning, it is quite difficult for you to be successful. Not only in stock market but in any investment decision you ever do.
It takes me years after investing in stock market to discover these basic investing rules. It is not my intention to impose new rules to investing, but you'll be on the winning side if you know the basic rule of the game.
Basic Investing Rules 1: Investing Needs Money
Companies are approaching bankers, wealthy individuals and public investors asking for money. Therefore, only capable investors (at least have the money) should invest in the stock market. Though not the fastest way, saving money is the easiest method to accumulate wealth.
How much money will you be saving is depend on your financial goals, income capability and time availability. I myself allocate 30 to 50 per cent of my salary as a 'forced saving' to expand my investment muscle. Find out how much you should save from my retirement planning step by step guide.
Latest US surveys found that more than 50 per cent of the population is expending more than what they earned. Make sure you are not one of them!
Basic Investing Rules 2: Start Investing Only If Enough Money
Having money to invest is just not enough. After all, you aren't going to invest with your medical fund are you? Lying at home without proper medication just because you'd lost the money in the stock market should be the last thing you ever want to be happened.
Under normal circumstances, you should not seriously consider investing unless you had satisfied at least one of the three following conditions:
- You have six months income worth in savings.
- Your current assets equal to your current liabilities.
- You have just acquired a sudden windfall or inheritance, which should be thought as capital and not as current income.
Basic Investing Rules 3: Know How Much Money to Invest
Greedy stock traders risking ALL their money in stock market, but smart stock investors invest within their surplus in savings. It is just a common sense, but you will be amazed on how investors around you get greedy when stock market appear to be very bullish.
I let six months worth expenses all the time in my bank account. In case the market turn against me, I'm not panic like other investors do. In fact, I will take advantage from this market inefficiencies to double my return by buying undervalued shares, while continue living my own life!
Basic Investing Rules 4: Have Investing Goals
Understanding your objectives is the major part of successful investing, and many don't have them since the very first day they start investing.
Ask yourself, do you invest:
- For short-term, medium-term or long-term?
- For your kids' education, buying new homes or for retirement?
- For income (dividend) or for growth (capital appreciation)?
Specific goals can direct you to specific investment plans. Having definitive investment plans will then make your stock investment practice much easier. More importantly, you are not influenced by the crowd; not easily tempered by the bull market and not panic in bear market.
Basic Investing Rules 5: Aware of the Associated Risk
There are always risks in investment. In stock market, the risks include:
- Individual Financial risk.Probability that you went broke, either because you lose your jobs or businesses. You didn't know when you get fired due to downsizing or business went down due to stiff competitions.
- Companies Business risk.Probability that the companies that you invest in went down either due to stiff competitions, mistakes in business directions or corruptions in it's own management.
- Stock Market riskSometimes, the stock you invest in has nothing wrong but because the market sentiment went down, will also effect the price of your stock.
In stock investment, it is not about avoiding risks that matters, but rather reduce the risks to the lowest level right from the dollar you cash in till the dollar you cash out.
Though all the basic investing rules are really that basic, don't take it lightly when it comes to money. Strictly follow the rules, and the money is yours.
Related Books
Buy and Hedge: The 5 Iron Rules for Investing Over the Long Term (Minyanville Media)
The Winning Investment Habits of Warren Buffett & George Soros
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