Investing is one of the surest ways of building up passive income. But many beginners falter for lack of sound knowledge about investing principles.
Whether you are an employee of a corporation, self-employed or a businessman, you can earn great amounts of passive income by becoming an investor. Many people try their luck at investing but come up short.
The major reason for this is lack of prior knowledge about investing. It is of paramount importance to learn the basic investing principles before diving into the practical world of investing. In this article thirteen basic principles will be discussed briefly for newbies.
Principle 1: Diversify
The first and foremost principle is to diversify. Even if you are starting out with a small amount, it is always better to buy more than one stock. In this way even if a couple of stocks underperform, the other stocks making up your diverse portfolio can take the brunt.
Diversification is the golden principle of investing. At no cost should you ever ignore this rule.
Principle 2: Start investing at an early age
I am sure you all have heard about the power of the compound effect. Well as the old saying goes, compounding can be your best friend. What it means is that the longer period for which you have your money invested; the more you stand to gain. The longer your money will work for you.
Those who start out at a young age, definitely have an advantage over their peers. But don’t worry, because even if you didn’t you are always early as compared to those who never decide to start investing.
Principle 3: Invest in what you know
This implies two things. First is that you should try and buy stocks of a company, whose business you know about. Even if a little. Rather than jumping into a company about whose business operations you know nothing about. Second, is not to get ahead of yourself in the investing business.
What I mean to say is that keep the invest amount directly proportional to your learning curve. And not go into complex trading options prematurely. By all means go for it, but only and only once you have mastered the core concepts.
Principle 4: Don’t let temporary market slumps alter your long term investment plan
Don’t make the rookie mistake of getting on the band wagon. More often than not, people tend to buy when others start buying and sell when others start to sell. This sets off a chain reaction and doesn’t necessarily reflect the true picture of the market.
Don’t alter your complete investment plan and your portfolio based on a temporary market slump. Often there are spectacular gains to be made by sticking it out.
Principle 5: Don’t doubt your trades
Once you have made a decision based on sound analysis to sell a stock, never look back. Don’t be like those who say, what if I had held on a little longer? What if I hadn’t sold the stock just yet? Never second guess your own decisions. If you do this, then you can never become a successful investor.
Principle 6: Dollar averaging
What this means is that regardless of the market condition, you keep on investing the same amount of money monthly into your portfolio. Believe me it really works. Although, there are not many such schemes or options out there nowadays. But if you look hard enough, you will find them.
Principle 7: Never Panic
An investor needs nerves of steel. You can’t let your emotions get the better of you. Often there have been occasions in the history of markets, where people have jumped the boat too quickly. An investor needs a level head. This is not saying that you not take risk into account. A
ll I am saying is that keep your emotions out of it. Only keep your wits about you. And you will start to see things for what they really are. For e.g. sometimes a news breaks which has an adverse effect on a certain industry. As a result people start getting out of its’ stock. But this shouldn’t mean that panic should set in and other industries which are doing just fine also start to feel the heat of selling.
But this is exactly what happens in the majority if the cases. But the winners are those who keep their cool. For soon enough the market corrects itself and those who sold tend to be the losers.
Principle 8: Pay attention
Always remain alert and pay close attention to what is going on with your portfolio. Even if you are dead sure about certain great stocks, you should never stop monitoring them. It only takes a moment sometimes for the surest of stocks to tank.
Principle 9: Bet on your winners and vice versa
Always stick with your winners and try to get rid of the losers as quickly as possible. Don’t wait for the things to turn for the better. Rather, minimise your losses. And stay with winners. Discard the losers in an intelligent and timely manner.
Principle 10: Go for a stop loss
This means that you should always set a limit at which your stock is automatically sold if it suffers a loss. It is the surest way of reducing your losses. And it is especially helpful for the newcomers to the world of investing. And the opposite holds good for your profits.
Don’t be extra eager to sell if your stocks start to rise in prices. In other words, you can afford to be slow in taking profits but not always fast with your losses.
Principle 11: Stick to your original plan
In investing as with any other thing in life, it is crucial to stick with your plan. Don’t change the direction of your sails with every little change that happens in the market.
If you have started your portfolio with well thought out stocks, stocks that you know about, then stick to them.
Principle 12: Don’t spend the principal amount
Always buy your stuff or pay your expenses from the dividends from your stocks or the interests on your savings. Never ever reduce the principal amount. Rather on the contrary, always make it grow by re-investing a margin of the profits and earnings.
Also make sure you don't invest money you can't afford to lose like house mortgage payments, money for groceries etc.
If you don’t grow your asset column regularly, you will be left behind in the world of investing. Always follow the rule of paying yourself first. If you follow this principle, then in no time you would have grown your portfolio.
Principle 13: Face your fear
You can’t be right with your moves all the time. And it is not important to be. You will make some mistakes. And that is all right. As long as you are making few good ones, you are on the right track.
You are going to turn a profit in the end. Many people tend to lose out on the deals of a lifetime because of the sole reason of fear.
If you follow the principles given above, then you are on your way to becoming an investor. You must always remember that money doesn’t always makes money. Money is an idea and nothing more. Ideas make money. And that is why it is important to know the basic investing principles, before you decide to test the waters. In the world of investing, always use your mind.
Author’s Bio: This article is written by Jacob Arch, He is a famous article writer and a teacher at Assignment Service. He completed her Bachelor in Literature from University of London, UK.
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