Every person wants to create a lot of wealth to fulfill their endless dreams by investing a very small amount. And, yes there are different ways to fulfill this dream, but one needs to have a good strategy to make handsome returns. According to the researchers, the most important thing a millionaire does is that he focuses much on growing his wealth by planning his investment strategically.
Investment in stocks is the easiest way to become rich. However, it is one of the easiest ways to lose money also. Although investment in the stock market is simple but not at all easy. It requires a lot of strategic planning, patience, passion and discipline. One must have a sound knowledge of the market, trading skills and capability to research well.
Although there is no sure shot formula to get success in the stock market, there are some guidelines which can be followed to increase the chances of making decent profits.
- Understand before you invest in the business
One should always invest in a business by understanding it rather than simply looking at the stock prices. Better understanding of the business will help one to analyze the future prospects of a business which results in making better investment decisions. Warren Buffet always invested in the business he understands well. Once he invested around $1 billion in Coca-Cola in 1988 and earned 10% returns CAGR in the next 30 years. Take any sector you have good understanding in. For example- If you know technology well, invest in the technology stock. If you are from a medical field, invest in stocks from the pharmaceutical world and you will earn amazing profits.
- Invest by thinking at least 10 years ahead
While making an investment decision, one should always think 10 years ahead whether the company will retain its goodwill in the market 10 years from now. Think of the companies which have greater possibilities of growing in the near future and if you find one, invest in, you will be rewarded with good returns in the long run.
- Calculate the Risk before investing
While investing, one must use solid technique to shortlist any company and do thorough research by reading its financial status to understand the exact financial health of a business. Most of you invest huge amounts of money without performing any research and sell it the very first time when the market hits a low price. This is how you lose your hard earned money. One should always invest the amount which he won’t need in the coming 10 years. As you know, the market shows various ups and downs and if you happen to need the money, you will hardly get any when there is a recession.
- Avoid Herd Mentality
Never invest in a particular stock just because your friends or relatives are investing in. A good investor always researches and analyzes the business well before investing. It’s better not to follow someone else’s investing strategy as it may not get you good returns and you might end up losing your invested money in the long run.
- Follow a disciplined Approach
One should always be ready to face the calculated risk and plan a necessary action to take in while investing. The volatile nature of the stock market gives panic moments to investors when the market is down. At the same time, most of them put their money in with a disciplined approach and generate excellent returns. Investment requires systematic approach and patience while investing in the right shares to earn greater returns in the long term.
- Diversify your Portfolio
DIversifying your assets is the best way to balance the risks and earn optimum returns. Diversification levels vary from investor to investor and also helps one to reduce the volatility over time.
- Buy and Hold
Buying and holding a stock for a longer duration can benefit you in terms of returns. Most of the investors sell out their stocks when the market is down but most legendary investors believe in the buy and hold method. According to their methodology, wealth can only be created if investments are done in good companies for a longer period of time even when the market is down.
- Never Time the Stock Market
It is almost impossible to predict the accurate top and bottom price of any stock. By following this strategy, one can lose his hard earned money in no time. It is very rare to find a great stock but if you find one, you must invest aggressively.
- Avoid Fear and Greed
Investors should never let their emotions influence the investment decision as it might end up in huge losses. While trading, investors have a lure of making more wealth and thus end up in investing in wrong shares. Always have your eyes and brain open while investing in any stock. Fear and greed are the two worst factors that one needs to control while trading.
Another way to create wealth can be compounding, it can only be successful if you are doing it for a longer time. The better understanding of compounding helps you grow your wealth phenomenally. Even a small amount invested for a longer duration makes a huge difference. Suppose, you have invested Rs 10 lakh for 20 years, it can simply become 100 crores in a 30 year career in the stock market. Good businesses compound over time which helps you in compounding your wealth over time. There are 5000 stocks one can trade on any given day on BSE. Invest in the most knowledgeable sector, understand the concept of compounding and you will surely reap greater returns over time.
Creating wealth in the stock market requires a lot of patience, research and trading skills. Investment is better called as an art as you use your research skills to buy any particular share and it goes up for a different reason and you still enjoy the returns. Profit comes with the right investment strategy, patience and trading experience, you just need to trade on.