Basic rules to invest in stock
Undoubtedly, stock is one of the best vehicles to invest in and make profit. People benefits from investing in stock through two sources: dividend and capital gain. To invest well, one must understand at the least the fundamental of business, competitive advantage and accounting principle.
Rule to select stock: Only buy stock of company that you truly understand how how it makes money.
A company must offer products, services to its customers to make money. The long-term potential of this company depends on how well it competes with its competitors and how well it adapts to change in the business environment. Because some companies can make a lot of money today can die a few years later. This is not good company to buy since one should buy and hold on the stock over several years.
Rule to buy stock: Only buy stock when the price of stock is low enough. If you can buy it at the rock-bottom price – it is the best moment to buy.
The price of stocks fluctuates over time depending on supply and demand principle of the market. If there are many people want to sell, the price is decreased. On the contrary, if many people want to buy it, the price goes up. Price goes up or down in short-term always related to the trend of buying and selling of investors, not really the performance of the invovled company. Make sure you buy when the price is relatively low, for it is not easy to jump on opportunity to buy at low price.
To buy well, you need to understand numbers according to accounting rules. Based on these numbers and your own knowledge of the concerned business, you can determine if the price is overpriced or underpriced and make your decision accordingly. Regarding numbers, you must check at least these numbers: how much profit the company make annually, how much its true tangle assets that can be converted into cash (in liquidation), EPS, P/E. Make sure that you understand the connection between these numbers with the current price of your interested stock. Mind you that your stocks are common (get paid after prefered stock) or prefered stock (get paid first).
Rule to sell stock: Only sell when the price of stock is higher than or exceed your expectation. If you can sell the stock at the high point, that the best too.
When to sell is difficult thing to decide. You must compare the price at which you want to sell with the price you bought the stock initially. If the capital gain and the dividends that you have been earned satisfied you, then you can sell as long as you don’t regret your decision no matter what happen later. If you sense that the price continues going up, you can hold to it more time but make sure you know what you doing. One trick is you can check how many stocks are currently traded: buy and sell.
Some veteran investors said you should hold on the stock for very long time to gain immense profit. But this is not always true because how fast price increases over time is not homogeneous; some periods it increases quickly, some increases slowly, and sometimes it just stagnates. When you sell, you can gain more capitals, but you must pay taxes and you also must know what to do with your money. If you invest again in stocks, you would choose other stocks or the same that you’ve just sold? Buying and selling inherently connects with opportunity costs, administration costs, fees, taxes…be careful. Furthermore, you must know that investors who hold stocks over many decades because they don’t need that money to spend. Oftentimes they earn dividend a long that time but dividend generally is very small in comparison to capital gain.
I hope this post is useful to you.