Introduction
Stock investing has changed drastically over the past few centuries. Before the late 20th century, investors have to physically visit stock exchange or brokerage firm, fill out forms to buy a stock. The entire process could take weeks to complete, and eventually receive a physical certificate proving the ownership of the stocks. Information was limited, primarily sourced from newspapers, financial publications, and company reports.
However, buying a stock is so much easier and efficient today. Just pull out your phone, download a brokerage app, and with a click of button, you can own a stock of your choice. With unlimited resources online, you can instantly access information you—financial reports, insights from other investors, the sentiment regarding specific stock—all contribute to making investing easier.
Furthermore, stock investing has become more widely accepted by the public. I remember that when I was young, I often heard people talking about how risky stock investing is, that you should not invest in stocks, you are going to lose all your money, and it is similar to gambling. Perhaps one of the reasons has to do with culture, even my brother asserted that stocks investing is a form of gambling. However, I believe the primary factor contributing to this wrong perception of stock investing is the lack of education on the subject.
Is Stocks Gambling?
Before delving into investing in stocks, it’s crucial to address a common misconception: Are stocks a form of gambling? I believe two criteria need to be satisfied to consider something a form of gambling: it involves money, and it relies ENTIRELY on chance. Not all investments are considered gambling. People invest in homes, real estates, toys collections such as Lego, shoes, but nobody considers them to be gambling, even though money is obviously involved. Therefore, the critical distinction lies in the reliance on chance.
Gambling involves the use of money with uncertain results that cannot be influenced by you except for replying on luck. How do you know which slot the bouncing ball is going to land on when you play roulette, how do you predict a win when playing a slot machine, when you should press the spin button, should you press after certain number of seconds have passed after you put the coin in? Should you analyze the pattern? Is there even a pattern? The fundamental is, is there anything you can do to influence the results apart from relying on your luck?
It is not entirely accurate to say that stock investing is definitely not a form of gambling. The distinction lies in the approach. If you merely pick stocks without conducting research and hope that it will just go up, it indeed is considered a form gambling. However, if you have diligently researched and discovered that the company has a lot of debt and minimal cash, you would probably not buy it; if a company with robust financials is found to manipulate its reports, you would not buy the stock; perhaps you discovered that the stock price of the company you considering buying has bad fundamentals. But the price went up because of exaggerated news hype. All of these can influence the result and increase the chance of success.
Should You Invest in Stocks?
We have addressed that stock investing is the same as gambling, if you have the right mindset. And if you are ready to start investing in stocks, you have to know that it is certainly not easy, it demands significant effort, resilience, discipline decision making and the aptitude to learn from experiences.
Do Your Due Diligence
Investing in stocks is not a simple game of chance; it’s a strategic endeavor that demands diligence. The first step of investing is to conduct thorough research and homework. Before committing your hard-earned money, understand the financial health of the companies you’re considering buying, delve into their management teams, and analyze industry trends. Ask yourself, “Why am I buying this company?” A success in stocks requires thorough research and information for informed decision-decisions.
Be Patient
Patience is a virtue that holds particular significance in the world of investing. Investing in stocks is not a quick path to wealth; it takes years for a company to develop and grow, therefore it takes years for you to yield the maximum returns on your investment. Although markets are subject to short-term fluctuations influenced by various factors, but successful investors look beyond these gyrations, and focus on the long-term outlook of a company. Patient investors are often rewarded as their investments have the opportunity to grow over time.
Be Emotionless, but Use Your Judgment
Do not be influenced by your emotions, selling when the price drops due to fear and buying when the price goes up due to uninformed optimism is not the way to invest. Many people say invest like a robot, ignore your emotions, they are not your best partner when it comes to stocks. Return to the fundamentals and figure out the cause of price changes. When the adrenaline kicks up, take a moment and re-access the company. Emotional discipline is a key pillar of a successful investment strategy.
Be Able to Take the Loss and Move On
Investing inherently involves risk. There is always a chance that a company with good financials can go bankrupt due to government legislation, as seen in the demise of tutoring industry in China following a government ban. Losses are a part of the investment journey; they are the tuition fees you have to paid to grow. Being able to accept losses, learn from them, and move forward is essential. If unforeseen situation happens and you find yourself facing bad luck, just accept it and move on.
Assess Your Risk Tolerance
Understanding your risk tolerance is a crucial aspect of investing. Consider how much risk you are comfortable taking on and align your investment strategy accordingly. That is why you should create and emergency fund, and never invest the money you will need in the near future. A well-balanced portfolio takes into account your risk tolerance and diversifies investments to mitigate potential downsides.
An Easy Way to Invest: Index Funds like S&P 500
For those looking for a straightforward approach to investing in the stock market, index funds, such as the S&P 500, offer an attractive option. It is also the advice Warren Buffet for people who would like to be a passive investor. These funds passively track the performance of a broad market index, providing diversification and a low-cost entry into the stock market. Index funds generally yields decent returns. Even though the returns are less than investing in a potential growth company, it is a safer option with low risk.
Conclusion
The decision to invest in stocks is a multifaceted one that requires careful consideration and strategic planning. Stocks are not a form of gambling; they are a vehicle for wealth creation when approached with knowledge, patience, and disciplines. By conducting thorough research, maintaining emotional discipline, and adopting a long-term perspective, you can navigate the stock market with confidence. Whether you choose individual stocks or opt for the simplicity of index funds, aligning your investment strategy with your financial goals is key to building a resilient and successful portfolio. It is important to also note that stock investing is not for everyone.
If you wish to learn more about investing in stocks, “One Up on Wall Street” by Peter Lynch is a good book for learning how to invest. It talks about different stock categories, teaches you how to use your edge to find good companies ahead of other investors and institutions, when to buy and sell, and how to analyze the companies you are interested in. If you are interested, you can purchase a copy and start your investing journey using the link here.
Read “How to Start Investing: Full Beginner’s Guide On Stocks” and start your investing journey today!
“Unleash your potentials and achieve financial freedom”
Pingback: How to Start Investing: Full Beginner’s Guide On Stocks