Five crucial steps for successful investing (in shares)
There are many ways to invest money, and sometimes investments take more abstract forms, such as investing in education (books and courses) or relationships. Still, most investors consider investing in various assets like commodities, ETFs, cryptocurrencies, and stocks.
And who knows better how to evaluate money than multi-billionaire corporations? But before you jump into share investments, organize yourself better, especially your investment approach. Try to incorporate these five steps into your stock investment strategy to keep risk to a minimum.
1. Search for investment opportunities
Create a system to search for potential investment opportunities. Many shares are available on the stock market (not speaking of other financial instruments). You need to have some approach that will lead you to the extra-promising ones. Create a system that will be efficient and will get you to the opportunities you want to invest in. Be flexible when it comes to searching for investment opportunities. Create databases of companies, analyze them during growth and decline, and evaluate them. Share your findings with relatives and friends who are also interested in trading and investing, communicate your thoughts, and don’t be afraid to argue about different possible scenarios.
At first, some things may not be obvious, and by discussing your investment idea with someone, you can gain a lot – you get valuable feedback. Follow actions not only by industries but also by region.
2. Evaluation of investment opportunities
Once you have an exciting selection of investment opportunities, look at whether it’s an interesting investment idea or just your distorted wishes. For specific companies, ask yourself the following questions:
What is the competitive advantage over other companies in that given industry?
Is their product, service, or production process sustainable in the long term?
What is the geopolitical situation in the country where the company is located?
What are the potential threats?
Take into account the legislative component, the management of that given corporation, etc. You should also be able to tell what type of company it is, whether it is a cyclical company, such as in commodities, or a small company that is potentially fast-growing, or a slow-growing, dividend-paying company. Take your time when it comes to analysis, do not forget to look at the financial statements, the history of the company, and the problems the company has faced in the past.
3. Portfolio management
At this point, ask yourself how many selected stocks (based on point 2) to buy. Also, pay attention to how much % of your total portfolio you devote to shares and other assets like securities/commodities/cryptocurrencies. as the allocation matters. If you hold only one asset, which is minus 30%, you can get into an unpleasant loss. But if you hold two assets, while one is in a loss of 30% and the other asset is in a profit of 40%, then you are balancing your portfolio, which is a more favorable scenario. In the described case, you would be in the plus situation. Also, consider whether you want to buy everything at once or incrementally to take advantage of lower prices in the future, for example. (We cover investment approaches related to timing in a separate article.) Pay attention to the reward-risk ratio because there are a lot of easily above-average investments, and from time to time, there are highly profitable investments. Of course, you would want to put relatively more money into those. All of this co-determines your long-term return. Also, think about how much money you want to keep in cash (FIAT money) – it does give you opportunities to buy faster at any given time, and that has its value. When managing your portfolio, determine which stocks to buy in what volume, when to buy them, and when to sell them.
*It’s important to pay attention to the allocation of your portfolio because it can have a big impact on the overall risk and potential return of your investments. Different types of securities, such as stocks and bonds, tend to have different levels of risk and return, and by diversifying your portfolio, you can help to balance out these risks. For example, if you have a portfolio that is heavily weighted toward stocks, it may be more volatile and susceptible to market downturns. On the other hand, a well-diversified portfolio can help smooth out the market’s ups and downs and provide more consistent returns over time.
4. Regular monitoring
By following the company’s updates regularly, usually quarterly or every six months (depending on how often the given company reports results), you get an overview of the corporation’s progress and the increase or decrease in the value of the shares. You should focus on the company’s long-term progress and want to learn as much as possible about it. You can compare it with previous results and subsequently correct your next steps (e.g., you may no longer want to buy the next quarter of the company’s shares). When you trade, the frequency of checking the situation should be higher compared to long-term investing. But watch out! Do not panic during fluctuations. How to overcome overtrading and handle trading psychology was the subject of the previous blog article. With regular monitoring, you can also gain confidence in the company and thus persist and buy at times when the rest of the market does not want to buy because, in a downturn, the market’s motivation to purchase assets is decreasing.
5. Doing nothing
It may appear strange at first, but developing psychological resilience is an essential part of investing. If you are a long-term investor, most of your time should be spent doing nothing, i.e., not making a trade. Of course, you can read various investment materials and go through new investment ideas, but you should not panic or get emotional and force yourself to buy. Sometimes it’s better to have investments as a hobby, something you do part-time, for example. Because if you give yourself fully to investing, it encourages you to be active. So, it would be best if you were more psychologically resilient because, by nature, those prices in the market are constantly moving. You have to get used to the fact that stocks fluctuate. Plus-minus 30% per year on the share price is no problem, and plus-minus 50% per year is also not a problem. As Peter Lynch (an American investor, mutual fund manager, and philanthropist) said: “In the stock market, the most important organ is the stomach. It’s not the brain.”
Patience is an important trait because changes in the real world take a long time (for example, a company’s expansion into a foreign market or business transformation can take years). In contrast, the financial world lives in seconds, and share prices change in seconds. The better you know what you own, the more room it gives you to be patient. If you are firmly convinced of the value of that company, then you have no reason to sell, no matter how low the share’s price, and thus you avoid the typical mistake of small retail investors.
To sum it up, having some order when investing is crucial because you can control your money and make prudent decisions. Try to put into practice these five recommended steps, and you can increase your chances of successful investing in the stock market.