Each person has a different risk -reward preference depending on his or her character , background , income or age . If you are a retiree , it would be better and want to play it safe , invest some of your cash ( not all ) in trusted mutual funds where they give you around 7 percent annual or yearly return on your funds . Mutual funds are safer because they invest in index funds where they diversify in a whole index such as s&p 500, T-bonds and in invest in a diversity of bluechips companies ( very strong companies ) and so on. However , if you are still young and productive , you could invest in some individual companies to get a better return .
Here are simple but important tips if you want to invest safely :
1. Leave cash in your account : It is very important to leave cash in your account to protect your financial strength . If the market drops as in 2008 and 2009 , you are on the more on the safe side , because you would lose less and then gain more as you buy undervalued stocks and sell them later when the markets recover . A mutual fund did well in 2008 and afterwards and outperformed the market because they kept portion of their money safely as a cash . ” Cash is king “in some cases.
2. Invest in companies that you know well : It is advisable and preferable to get to know well about a company and a business before you invest in it . Example , if you know well about the finacial situation of microsft , such as history , revenues , future growth , dividend pauments , net income , net cashflow , you would invest in it. These information lead us to knowing the fundamentals .Example, all people know that Microsoft offers programming services ( Microsoft Windows operating systems ) all over the world and is globally popular. Toyota very famous for manufacturing cars and one of the greatest producers and sellers of cars globally .
3 . Look into the fundamentals of a company such as growth , products produces ( BMW could produce Electric vehicles to grow ) , net income of a company , net debt , free cash flow . If a company does make a lot of profits with growing yearly income and positive cash flow , this would be a good indication to buy such shares since shares or stocks are value of real life businesses as said and you would not invest unless you find a company profitable and strong.
4 . Buy low , sell high : Many reputable investors tell you to take a margin of safety while buying a share . Take into consideration that usually or technically if a share price rises to its peak level in a certain period of time , it could rise again if the company is doing well . Only buy the price at a reasonable price where you have a potential to gain . Buy when the price gets low to sell at a higher price later . Warren Buffet did something well in 2008 and 2009 and started buying stocks when prices dipped and everyone started selling and would sell later on when prices would start to rise and all people started to buy .
5 . Look at the macroeconomic economic news because any growth in economic activity , increase in property sales reports , decrease in unemployment percentage and all could turn stock markets into having green upward arrows indicating the rising of the stock prices and the opposite is true.
6 . Diversification across many companies and many countries is a key to more safety so as not to put all your eggs in one basket . You could buy bonds of high rated companies or governmental bonds as well for more safety at a reasonable prices… Some advise you not put more than 10 percent of your money in one trade or in one company . Allocate them in different companies and different sectors… Ray Dalio , a famous multi – billionaire, interviewed by Tony Robbins , talks about 4 seasons strategies that does well in bear markets and bull markets and his mutual fund did very well even in 2008 and 2009 .The four seasons strategy suggests that you invest almost 30 percent in stocks , 40 % in long term bonds like 20 years and above , 15 % in medium term bonds like 10 years bonds , 7.5 % in commodities and 7.5 percent in Gold .
Never forget to leave at least one third of your account as cash and you could put your cash in banks that pay more than 2 percent interest to protect your wealth from inflation …
7 . Do not buy shares of a company all at once . Example , if you buy 50 shares of microsoft at 87 dollars and it drops to 80 dollars you could buy another 50 shares at this better price to sell later on and gain profits as the price rise again .Buy and sell in pieces …
8 . Buy some Gold and Silver that usually rise during recession as a way to preserve your wealth or money value . Some would say that you do not receive dividends as in some stocks or interest as in bonds but I say you could trade with Gold as well and somehow hedge your money or investments at the same time.
9 . Think for the long term or as sait wait and hold : Sometimes you could hold the shares for weeks or months before you see appreciation and get 20 percent return in trading or receive dividends , so have patience . Morever, there would be the compounding effect when you use your profits to reinvest them and gain . I recommend a book called the richest man in Babylon … Besides , Warren Buffet talks about importance of the power of compounding in accumulating wealth …
10. On one side of the equation, Stay calm and emotionally balanced as much as possible to take better decisions …On the other side of the equation , You are right and the logical fundamentals play a huge role but since people have emotions , emotions play a role in price deviations especially in the short run and in volatile stocks when people tend to react in different ways as in 2008 and 2009 .
Someone said that stock markets are like voting machines in the short run but more like a logical market in the long run following the fundamentals to make relatively fair pricing …
11. If you are new to the stock market , do not invest a large amount at first untill you get enough insight , experience and knowledge in stock markets and trading . You learn by your mistakes good lessons to develop great skills .Be confident in yourself but careful.
12 . Be prepared to sudden changes because sometimes unexpected changes in prices could take place upward or downward . An expert investor said that stock markets are like voting in the elections in the short run but would follow the fundamentals or the finacial situation of the company in the long run.
13. It is better not to place in stock markets more than you could afford to save or put aside after paying for necassary things in life .
14. Invest a small portion in new emerging companies you believe could become the new Google or new Facebook . Those who invested in Google , Amazon or Facebook in their early stages of growth years ago have had tremendous amount of returns or gains .For example , today some perceive companies of renewable energy technologies and cloud computing have a possibly good future growth and grear potential .
15. Seek counsel from more experienced people in stock markets , read books or watch videos to learn as much as you can . It is said that the more you learn ( and apply ) , the more earn .
Last but not least , I would be thankful to know your opinion whether you agree with me or not on some points .I hope these tips help all especially the beginners.