It is easier said than done. You want to invest your money, not to gamble it away. A lot of people unknowingly has become gamblers instead of investors. The distinction between the two is not what they do, but rather how they do it. How can you differentiate the two? Here are the basic distinction between the two.
Gamblers. I am not referring to individuals who went to the casino and gamble. I was referring to stock gamblers, individuals who blindly throw their money away in investing. They love buying stocks. The ups and downs of the stock price thrills them. Whether they make a profit or loss, they have no idea what causes it.
Investors. These are not individuals who merely buy stocks. They know what they bought, researched it beforehand and are aware of the risks involved. They may lose money on an investment but they knew why they lose and they learnt from their loss to improve future performance. They do not over diversify and yet they manage to spread their risk apart.
So, how do we all learn to be investors, specifically stock investors? First, we need to educate ourselves and know how to calculate the fair value of a common stock. If a stock is currently undervalued, we need to assess whether we can accept the potential return given by the stock. If the stock is 20% undervalued, would you want to accept that kind of return? If so, then you might buy the stock as an investment.
Aside from the potential return, investors also need to assess the potential risk associated with the purchase. What would make the stock to drop from your purchase price? The most likely occurrence is that a particular stock fails to generate a profit expected by your calculation. If your calculation shows a fair value of $ 50, while the actual profit generated warrants a fair value of $ 30, then you might experience a loss. This of course depends on what price you buy the stock for. Anyway, if you know the risk and reward of a stock purchase, then you can decide whether this stock is right for you.
Another tools needed to be stock investor is portfolio management. You do not want to over diversify but you also do not want to expose yourself to incredible risks associated with the adverse movement of your holdings. In general, you can do this by buying stocks of different industry or buying companies which engage in different kind of industries. Of course, the stocks you bought should fulfill your criteria as an undervalued investment.
Finally, you should keep abreast of new development. Investing is about identifying the best alternatives for your money. Right now, stock might be the best investment for the skills that we have. In the future, perhaps bond investing will be the best alternative to grow your investment. In whatever things that you do, please get familiar with a particular investing vehicle before committing your hard-earned money into it. This is what separates investors from gamblers.
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