Stock Market Tips For Beginners
With time deposit rates currently very low, many people are looking for other investments with better returns. One of the most popular is investing in the stock market. However, do not think of stock market investing as a get-rich-quick scheme. You need to have a long-term outlook and be knowledgeable about what you are doing.
Those who prefer to let others manage their stock portfolio can buy into a mutual fund composed of stocks instead. However, if you believe you can fare better by selecting the stocks yourself, here are some tips:
Assess your financial needs. Make sure the funds that you will be investing will not be needed quickly. Even some long-term funds like those allocated for the education of your children (if you have children) should not be used. The reason for this is the unpredictable nature of the stock market. The longer your time horizon, the better your chances of riding out the boom-bust cycles. According to many stock experts, you must be able to let your capital stay for at least 10 years or even more. Also, if you like the high returns potential of risky stocks, then use only the cash you are prepared to lose.
Look for a licensed stock broker. It is advised that you visit the PSE website for a list of licensed brokers. Better be cautious and seek referrals for good stock brokers from friends who have been investing and making money in stocks for at least a decade already. It would be best if that person had already experienced a bust cycle. Relying on people who were only in stock investing during this current boom may make you too optimistic.
Diversify your stock selection. Another factor to consider is the need to diversify your stock portfolio. If you buy stocks from only one company, there is a higher chance of suffering huge losses. The same is true if you buy stocks from only one industry or from related industries. A downturn in that industry will hit your entire stock portfolio.
Low PE ratios are not necessarily cheap. The PE ratio is the ratio of price divided by the earnings. Therefore a stock with a PE ratio of 10 means that based on its past earnings, it should be able to earn its price in 10 years. The problem is that the company’s situation may have changed for the worse. It is possible that future earnings will be reduced in half due to completion, for example. If you see a low financial ratio, consider if the market is just mistaken or if its future earnings are truly likely to worsen.
Do not put all your investment money in stocks. No matter how much money you are earning in stocks, it is not wise to put too much of your investment funds into it. Allocate funds to other investment options to balance your portfolio.
*Originally published by the Manila Bulletin. C-4, Sunday, April 14, 2013. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.