Are you interested in investing in stocks? There is no doubt that it can be a profitable option and there are thousands of people who have managed to earn high returns through it. Buying a stock means that you are literally purchasing a piece of a company. The piece of paper is essentially a share of ownership, which provides you a claim to the earnings and assets of the company in question. Historically, people were able to make profits via stock investment because of their access to investment advice and knowledge. These days, there is a wealth of information that would-be investors can find over the internet, but the problem is that it involves industry lingo and suggestions that are hard-to-decipher.
To help all of these people, Shay Benhamou has shared some basic stock investment tips and these are mentioned as follows:
Tip 1: First evaluate your financial situation
Before you jump into the stock market, you need to make sure that you have access to the funds that are required for making this commitment. As per Shay Benhamou, it is a good rule of thumb to not have any debt, or very little debt, particularly credit card debt. Plus, you should also have living expenses of almost six months in an emergency savings account. If you have this kind of a solid financial foundation, you can consider investing in the stock market.
Tip 2: Don’t forget to think about risk and return
This is common sense. If you want to make high profits, you will obviously have to invest in riskier and highly volatile stocks. If you don’t want to take on such stocks, then you have to accept lower returns. Most people are somewhere between risk-ready and risk averse and you need to figure out where you are at in order to make the right investment.
Tip 3: Diversify your investment
The sector, size, types of growth patterns and volatility of companies vary. According to Shay Benhamou, the smartest investors are those who don’t purchase one type of stock. Instead, they know that diversification of their portfolio is essential, which means spreading their money in different types of stocks and mutual funds that have a different level of volatility. For instance, in the 1990s, people who had invested all their money in technology stocks had lost everything in 2000 when the dot-com bubble burst.
Tip 4: Don’t let emotions get in the way
One of the most important things that people need to remember is that investment is usually made for retirement purposes, meaning that it is a long-term commitment. It is not for generating funds for your next big purchase. If you trade too frequently based on market fluctuations, you will only end up complicating things for yourself. In the short-term, the movements in the market are usually based on the virtues of excitement or fear. But, in the long-term, it is more about the bottom line i.e. the earnings of the company that determine the value of a stock and those that have a strong foundation are able to stand a significant amount of flack.
Tip 5: Assess the volatility of a stock
If you want to know the volatility of a company, thereby avoiding an emotional reaction to it, then it is recommended by Shay Benhamou that you consider the stock’s rolling standard deviation for 12 months in the last decade. To put it simply, you need to assess the average performance of the stock during this time period. A standard deviation of about 17% is considered normal, which means that the value of a stock can increase or decrease by 17% and this would not be out of the ordinary.
Tip 6: Buying low and selling high
Even though this appears to be rather obvious, it is extremely difficult for people to walk away when they are on a winning streak. Sure, it sounds logical that you should buy when the value is down and sell when the price goes up, but when the price is rising steadily, you don’t feel like selling. You would obviously want to make as much profits as possible, but Shay Benhamou says that if you want to protect your portfolio from risk, you need to harvest the stocks that have performed well and then put these gains into underperforming stocks. Perhaps, this might seem to be counterintuitive, but this is what rebalancing a portfolio means.
Thus, if the standard deviation of your selected stock is 15% and it falls more than that, then it might be time for you to rebalance and get more of it because there is a good chance it may go up again.
Tip 7: Invest in good companies
While most people will reiterate that past performance doesn’t guarantee future results, it is certainly a good indicator. Well-managed companies expand and thrive as prospects evolve, as they are managed by people who have a solid nose for opportunities. If a company is known for delivering consistent performance, then you be open to taking some risks. But, when doing so, you definitely shouldn’t forget the first tip mentioned above.
Tip 8: Understand market expectations
One of the key things that you need to understand is that stock price is not determined by performance; it is based on investor perception. Who hasn’t heard the story of a small, lesser-known company making it big and generating a lot of profits for its shareholders? The key takeaway here is that the company wasn’t well-known, which means that it hadn’t taken off yet. Hence, Shay Benhamou recommends that rather than looking for a company that already has an above-average growth rate, you should look for one that may grow more than market expectations. This means you should analyze the future growth rate, but this can be difficult to accomplish.
Apart from these tips, Shay Benhamou also recommends that you learn the stock market lingo because this will help you understand the market and how it operates, allowing you to make the most of it.