The Traffic Light Of Stock Market: When To Stop, When To Get Ready, And When To Go

Posted on Feb 25 2014 - 9:29am by Ian Elbanbuena

Stock Market

Most individuals who have reached a part of their lives where they aspire to grow their earnings turn to investing in the stock market to expand their wealth and reach their financial goals.  But with the stock market’s unpredictability, it cannot be determined when investors will earn considerable gains and when they will lose a huge chunk of their money. To guide you through stock market investment, here are a few key points to remember:

When to Get Ready

To be able to make sound investment decisions, be sure that the timing is always right. You will know that you are ready to invest after you have made an assessment of your finances. Check to see if you have any pending debts and if you currently have an emergency fund that can protect you financially in case you lose your job.

After figuring out these two concerns, you would then be able to compute how much you can allot for stock investment. You should keep in mind that the earlier you start in investing in stocks, the more your money will grow over time, even if you have only invested a small amount.

The next step for the investor is to learn about investing not only though research but also through an online brokerage provider or through your 401(k). By always reading and brushing up on the stock market flow, you will be able to identify investments with high fees and be able to avoid investing in them and focus instead on a better investment strategy.

Thirdly, the investor should come up with an investment plan to be able to map out their actions more clearly and effectively. Make your plan as simple or as detailed as possible—it’s up to you. Questions to help you create your investment plan should include whether or not the investment has the potential to provide you with income when you have retired, or if you are buying market shares in order to pay for your child’s college education. You should also factor in the time duration for reaching your goals, as well as the risk tolerance you currently have.

When to Stop

Sometimes it’s easier to just act like a sheep and follow the crowd especially when you are stumped on what decision to make. A key point to remember in investments is that following what everyone else is doing can lead to market collapse. Most successful investors make money by looking for undervalued investments with great potenaitl. For instance, billionair Warren Buffett himself advises of “being fearful when others are greedy, as well as being greedy when others are fearful.” Gut instinct plays a huge part in stock investing and you can try to see if you can hone yours.

Some investors issue a stop-loss order to sell their holding in a stock or other security in the event that its price falls to a certain figure. Stopping losses is normally done by short-term traders after examining a certain stock’s price movements on the chart and they see that the price is falling. On the other hand some investors who don’t rely on charts set a stop-loss as a response to price decline in the purchase price. In this situation, the stop-loss has acted as a tool for managing risks.

A stop-loss is normally established after a position is opened initially and the share of stock market dividend, stock index, and other financial instrument is first bought. You can set a stop-loss if you hope to sell your shares if their prices drop below your stop-loss level.

To be able to short a stock, you should have margin privileges on your brokerage account. Another tip would be to avoid a stock with a declining price. Some exchange-traded securities also look out for short sales with a higher rate than a previous sale before shorting a stock. Finally, it is advised that there should be enough funds left on one’s account to place a buy to cover order on one’s short sale. The increase of stock price on your shorted security can allow you to get a margin call to make sure that there is enough capital left for purchasing the stock once again and returning it to your broker.

So how do you know when to set a stop-loss? A stop loss can stop you from having further losses for holding a certain share, but by doing an exit, you are also forfeiting the benefit from the stock in case it goes on a rebound.

When to Go

After researching and learning about investment planning and the rise and fall of stock market, you might now want to try buying and holding stocks. This is generally more advisable rather than to engage in active trading, as the latter will need the investor to be focused on fluctuations to stock prices, and this could not be possible if you are working full time for another company. Buying and holding good stocks is also suggested if you are the type of person who are not too big on risks and you are not prepared to lose a considerable amount of investment through active trading.

Holding stocks from numerous varied industries is also advised as it leaves your portfolio diversified, giving you some form of security from supporting different industries when the economy declines.

One more common mistake investors make is waiting too long to make a move. Investing is not all about timing the market. Do not wait to invest in a popular stock mutual fund after checking the charts and predicting that the market is ready to climb. Even good companies can go down. You should also be careful not to sell the fund as soon as stock prices fall. Sometimes, it could still go on a bull run, and all you need is patience to wait for the stock’s rebound.

For mutual fund investors, it is also important to know how to choose a mutual fund with low fees rather than choosing a fund that has performed well in the past. Pick well-diversified, low costing open-end index funds rather choosing funds based on performance, as fees are more predictable as opposed to the performance of a fund.

If you are not an avid fan of spending time at the banks depositing payments, you might want to look at the online stock market and use your credit card to buy stocks.

Conclusion

The basic thing to remember in investing is to invest in stocks regularly, always examine the stock market flow, be patient, and don’t be swayed by other people’s opinions when it comes to investing in the stock market. You should also note that being a good investor means having emotional stability to ride with the rise and fall of the stock market.

About the Author
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Ian G. Elbanbuena is an online education advocate and a content contributor. He’s representing Paradigm Global Education Management Ltd (PGEM) He’s main vision is to improve lives of individuals through online teaching and study programmes. He also help in giving hope to students who want to come up with better career and college experience through SAT/ ACT Training, study programs, university counseling, tutorials and corporate advisory services.