Article written by Sherin Dev; Follow me in Twitter
A previous article in this blog titled how they lost their Rolls Royce in Wall Street? A Counsel on 20 Deadly Investment Mistakes, I have given a list of 20 investment mistakes. These are so deadly mistakes most frequently commits by investors around the world. I am so happy, my study and research finally ends up with such perfect list of common, but deadly mistakes.
In this article, you will find a list of must required preparation steps for any investor to understand prior to start investments in stocks. Once after, reading both articles, your mindset would be changed entirely by having all necessary information on the do’s and don’ts succeed as a stock investor. Here it goes:
1. Self assessments to know stock investment readiness
- Prior any plan to invest on direct stocks, have a proper self assessment to understand your readiness to invest on stocks directly. Note down your thoughts about stock market gains and losses. Identify why you think you are suitable to take direct stock investments and what are your fears related to stock markets. Have a deep look on your patience level and capacity to control panic driven activities. Once concluded, you will come with a final result to understand whether you are suitable to invest to the stock directly or not.
2. Set proper investment goals
- Ask self, what lead you to the decision of making direct stock investments. Define your goals. Get answer to the question of why do you want to invest in stock market than other investment instruments that have capital guarantee. Understand the span of your goal. As stock market investment suitable to achieve only long term goals, may be an investor required to stay invested for more than 10 to 15 years, identify whether you are able to stay invested for long or not.
3. Understand asset allocation
- An investor should have good understanding on asset allocation. Definition of asset allocation is “An investment strategy that involves committing specific percentages of a portfolio to different asset types such as stocks, bonds, or money market instruments. The portfolio should be rebalanced periodically to maintain the target percentages.” Identify whether your stock investment is a part of your own asset allocation model or are you taking risk of not having a proper asset allocation model but investing entirely in the stocks.
4. Learn the basics of stocks and stock markets
- Acquire sufficient knowledge in stocks and stock markets. What is a piece of stock meant to an investor, how stock markets works, who all connected to stock markets directly and indirectly, what are the risks and returns associated to stock investing etc. should be learned well. Without knowing the basics nothing goes to succeed.
5. Direct influencing factors to stock market
- There are various factors plays major roles to the up and down nature of stock markets. Understand what are the major factors influences the stock market to make the investor rich or poor. Such knowledge highly helps to prepare early to take critical investment decisions and not lose any right opportunities. Understand the difference of macro and micro economic factors and how both influence companies.
6. Create an investment intellectual framework
- Successful investor should acquire knowledge on how to select a good stock, when to buy it an when to sell. Use all possible, available sources for acquire knowledge. Read maximum about great investors, basic character and investment styles and finally create your own investment intellectual framework. An intellectual framework is nothing but a set of well defined investment rules for self to stick and follow. These are basically the well defined rules to select the type of businesses to invest, checklist to analyze the candidate, supported factors and time to invest, how much to buy and when to sell. Once have a fantastic intellectual framework, an investor should stick with it using extreme discipline.
7. Know the deadliest investment mistakes
- When comes to the section of selecting a stock to invest, have a practice of collecting biggest investment mistakes happened around you and in the world. Learn about those mistakes and ensure any of such mistakes not happened to you as an investor. Here is a list of 20 deadly investment mistakesthat would enlighten the skills of an investor by avoiding each of it when make investments.
8. Learn Diversification
- A good investor should have a portfolio without over diversification and less diversification. Proper diversification requires knowing and studying more about it. Understand different sectors, different types of businesses, stocks like large cap, mid cap, small/micro cap, how much to invest on each sectors, companies with different sizes, all should come under consideration to get proper portfolio diversification.
9. Understand when to sell
- I have already mentioned, investment knowledge should not shrink to the section of good companies, but should include better skills on when to sell. Unlike selection of any stock or stocks, it is very, very difficult to understand when to sell a stock. My better advice is to read Philip Fisher’s classic investment guide “Common Stocks and Uncommon Profits” to know when to sell a stock without lose.
10. Have a better self control
- Read more about great investors and adapt the best qualities that helped them to become greatest investors. More over skills, an investor should gain personal qualities that highly required by good investors. Patience, prudence, common sense, passion, discipline are some of the most required skillsthat any investor should build. If take the story of any successful investor, we can find such skills are top in their personal qualities.
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