Table of Contents
Safe investment in the stock market involves several rules that are worth implementing. The stock market is a place that offers great earning potential if you invest in an efficient way. However, a bit of luck is needed. How to play the stock market and how much can you earn?
Safe investment in the stock market
The biggest problem in earning systematically on the stock market is the risk of losing a lot of money, which is related to the volatile market. Shares of companies can grow in a very impressive way, but in the long run there will also be periods of price declines. However, there are investment strategies that allow you to make money on the stock market regardless of the stock market.
Below is a list of several strategies that allow you to invest in the stock market even when financial markets are in a downward trend. However, these are not easy methods. They require in-depth knowledge and analysis of the market situation or specific companies.
How to reduce risk when investing in the stock market?
In theory, the goal is simple. You need to select the company that has the best chance of expanding your capital and achieving financial success. The right choice is therefore the most important, but also the most difficult. It is very difficult to estimate even by experts, so it will be all the more difficult for a beginner to do so. In such a case, it is worth taking advice from experienced people who have been investing in the stock market for a long time.
You may also read: How to read stock trends
Professional investors have their own tricks and tricks to reduce the risks associated with investing and ensure at least partial success.
Investing in several markets
This is the most obvious way to avoid losses in a particular financial market. If an investor focuses only on the one stock market, his investment portfolio will suffer heavily in case of declines. Therefore, it is worth being open to other markets that will behave in a different way.
The number of financial markets is really large and it is always possible to find one that will give a good rate of return. The problem, however, is that this type of analysis can be brought only after the fact. Prediction in this case is basically impossible. However, investing in different markets is a good way to make your overall portfolio less risky.
Getting rid of misconceptions
Investing in the stock market has long ceased to be reserved for the wealthy. Currently, almost everyone who has some financial surplus thinks about investing it. And what exactly is investing?
Investing is said to be when an investor allocates a specific sum of money for a specific period of time in order to get a return on these funds in the future, which will be increased by bonuses from the investment. Seemingly, it looks pleasant and very simple. All you have to do is put your money in someone else’s hands, such as an investment fund, for a certain period of time.
However, there is a small detail – by investing the capital, the investor risks losing it. It may happen that he will receive less back, and in extreme cases he may get nothing at all. Investments, even those that are advertised as completely safe, may not always yield a profit. Depending on the risk, more often or less often, they can bring a loss.
Investing in the stock market is associated by many as a great way to start an investment adventure, offering the hope of a simple and quick profit (you may also read: How to start investing in the stock market). All you have to do is read some analysts’ advice, open a brokerage account and start making money.
Meanwhile, the reality turns out to be different. Before investing in the stock market, it is necessary to prepare properly, both theoretically and practically, by using stock market simulators.
Instruments that allow you to make money on a decline
Even when an investor’s primary financial market is falling, he can still make money. There are many instruments on the financial markets that allow you to make money during declines in stock prices and indices. Such a possibility is offered, for example, by futures contracts, futures or options.
Such financial instruments are called derivatives. Their primary purpose was to reduce price risk in commodity products and raw materials, but over time they have become very popular among investors, who now generate most of the turnover in the derivatives markets.
However, it should be remembered that these instruments are characterized by a very high degree of investment risk. Making money on declines is very optimistic, but their inappropriate use, can also result in the opposite situation, that is, incurring losses when the market rises.
In addition, an additional risk factor is the considerable leverage that such instruments are bound by. Improper use of them by a novice investor, can end up with considerable losses.
Search for market opportunities
Safe investment in the stock market can also be associated with the search for opportunities. This is an alternative to investing in the broad market. The idea is to specialize in finding market opportunities. Such an investor works on the assumption that even during a downturn there are companies that will gain strongly in value.
An investor can specialize in a particular market segment and within that segment look for market opportunities that enable above-average rates of return. Simple examples of such sectors are technology companies or computer game manufacturers.
Waiting out the low economy outside the market
This is one simple way to avoid losses when stock markets are falling. At such a time, an investor can withdraw some or all of his funds from the main market. The moment prices fall to a level that the investor finds good, he can return to the market and take advantage of reduced stock prices.
However, what should an investor do with the funds after withdrawing them from the market? In such a situation, he has a choice of many instruments to preserve the real value of his capital, such as bank deposits or government bonds.
Playing on market events
Another of the strategies for safe investment in the stock market, is to make money on market events, i.e. company mergers or amalgamations. Taking the right position at the right time can bring considerable profits, if investors correctly predict the scenario in which the events associated with a particular transaction will unfold.
Shares of troubled companies
This is a strategy that involves specializing in investing in companies that are in trouble, such as those in bankruptcy. Bringing a bankrupt company out of bankruptcy can give really high returns, although this type of investing in the stock market is also associated with the risk of sizable losses. This type of investment requires knowledge of bankruptcy and restructuring law, as well as strong nerves. You can also try your hand at speculation – these types of companies attract speculators.
Automated trading strategies
These are investment strategies that are based on sequences of automatic orders, aimed, among other things, at exploiting technological advantages. The actual behavioral mechanisms are programmed either directly by managers or using machine learning mechanisms. Very often they are used together with strategies that allow you to make money on price drops and focus on financial markets that are characterized by high liquidity.
What are investment strategies used for?
Investing in the stock market seemingly may seem very simple. All you have to do is open an investment account, deposit funds and start trading your chosen assets (read also: Online trading). According to statistics, up to 75% of investors lose in the stock market, and the reason for this is to act without preparation and strategy. So what is an investment strategy?
Simply put, it is a set of specific rules of action, which are related to the conclusion of purchase and sale transactions in a specific market. Such a scheme of action should facilitate the investor to achieve the set goal, along with the expected rate of return and the accepted risk.
If the investor acts in accordance with the established strategy, he will make his decisions rational and based on certain premises, and not just intuition.
Some people say that as many as a person in the stock market, so many different strategies. This is true, over time, in principle, each investor develops his own strategy, which is individually tailored to his needs and expectations. In the beginning, however, everyone uses ready-made schemes.
Safe investment in the stock market – how to make accurate decisions?
Investing in the stock market requires learning two types of analysis:
Fundamental – aims to analyze the economic condition of the company under study in order to assess its value. It takes into account such factors as the analysis of the macro environment, the sector or sectors in which the company operates, the financial analysis of the company and its valuation,
Technical – is designed to determine the likely change in share prices in the future based on an assessment of them in the past. It takes into account any factors that have had or may have an impact on the formation of their supply and demand.
How to invest based on the above analyses?
Choosing a company based on technical analysis is first of all:
- Investing in the stock market with the trend – there are three basic types of trends, namely upward, downward and sideways. It is a good idea to use a technical analysis program and review all the charts of companies, and then choose those with an upward trend,
- Avoid illiquid companies – these are those whose daily turnover closes in a few thousand zlotys. In such a situation there are usually problems with closing positions, so even an accurate analysis may not translate into real profits,
- Avoid companies that plan to report financial results within a few days of the investor’s analysis. The data, which will be unexpected, can strongly shake the share price and affect its profits,
- Look for trend continuation formations on the charts of companies, such as flags, flags or rectangles. The moment there is a signal in the form of a trend breakout line or a candlestick formation, the investor should buy.
On the other hand, choosing a company based on technical analysis is:
- Selecting a company that is financially sound, that is, one that has made profits alone or no losses over the past five years.
- Pay attention to the fact that the debt of the specified company is not higher than the amount of its capital,
- Calculate whether a specific company has earned twice as much in the last 20 years as an investor would have earned on government bonds,
- It is worth choosing companies that offer services or products that the investor knows and understands,
- If a company changes its business focus relatively frequently and issues new shares, the player should be particularly cautious (read also: Playing the stock market),
- It is best to avoid companies subject to government price regulation.
7 rules for safe investment in the stock market
Safe investment in the stock market is based on several important principles that are always worth keeping in mind.
Before throwing yourself into the deep end, you should learn the rules and how the financial market works. Otherwise, just as quickly as an investor started playing, he will finish. One good trade consists of several factors, namely preceding analysis, finding the right moment to enter, as well as exit, and managing the size of the position. If any of the elements are missing, the transaction may simply fail.
For many beginners, there is little variety between financial instruments. Safe investment in the stock market is when the player learns the rules as well as the connections between these instruments, as well as macroeconomic factors
The best solution is to find the golden mean, that is, to combine both analyses – technical and fundamental. It is best to start from the macro level – to look at where the investor is at the moment and what is happening in the world. It is worth checking the fundamentals if the investor intends to invest in the medium or long term.
The moment of entry is usually determined by technical analysis, which is most helpful when an order needs to be placed. Exits, on the other hand, are the resultant of all analysis. If the chart suggests that it is better to pull out, it is worth doing so. If the company has a very bad performance, this is also an important factor.
Learning from mistakes
Safe investment in the stock market also includes learning from your mistakes. It is worth learning to learn from your mistakes. Analyzing one’s transactions will often bring an investor much more than reading a dozen more items of theoretical knowledge. One can study many books, and still the most important thing is practice. An investor’s history in a brokerage account is the most valuable lesson he can learn.
If for a long time a trader does not make money on the stock market, or his balance decreases, it is a sign that he is doing something wrong. Sometimes it is enough to look at the history of orders and find patterns that ended in failures.
A concrete plan of action before investing
This is one of the most important rules before any investment, especially in company stocks, where there can be very large fluctuations in prices. And this in turn affects the investor’s emotional state. As you know, emotions are not a good advisor when investing in the stock market.
Therefore, it is very important to have systems for a plan before investing. It should assume the level of exit from the position when the situation will develop negatively, or set a specific event, the occurrence of which will result in the sale of shares. The same applies to positive developments.
Start learning with smaller amounts
Initially, it is best to invest small amounts. Such, the loss of which will not affect the household budget, preferably coming from savings, for example, in the order of $100-200 per share. Theoretically, with such transactions, the investor loses out on commissions, as the minimum commission is usually $3, but this is a loss of $2 to $2.5.
At the same time, it is worth using a stock market simulator.
Without knowledge of the stock market, an investor writes himself on the spot for losses – just like in any other field he would not know anything about.
Stock market game simulator
To invest safely in the stock market is, of course, to invest effectively. Before investing in the real stock market, it is a good idea to use simulators designed for learning how to invest in the stock market. On these types of tools you invest virtual money, which you can multiply or lose. Apart from the fact that the money is not real, everything else looks the same as in the real stock market.
What is a stock market game?
A virtual stock market simulator is an easy-to-use program that mimics real action in the stock markets. To start investing, each user is given a certain pool of money to start with. Then the investor can choose stocks to buy.
Stock market simulators try to match the prevailing circumstances of the stock market as closely as possible. Most of them also charge fees and brokerage commissions.
Manipulative amounts can strongly affect the final result of the investor , and the inclusion of them in the simulation, will help to take such fees into account, when the investor makes a purchase decision. In addition, simulator users also learn the basics of finance and become familiar with the terminology that is associated with investing.
Why try your hand at a stock market simulator?
There are many reasons to use a stock market app before entering the real market, in particular:
- A novice investor can get a good dose of knowledge about investing in the stock market. Most of these trading platforms offer real education in asset management,
- It’s a very safe space to learn the mechanics of trading and portfolio construction. This is the best place to make investment mistakes, as no money is lost. Free of charge is therefore a very important value that the stock market game offers,
- The investor can test his new strategies and types of investments. New techniques are worth trying out in the virtual world before applying them in the real market,
- The stock market game simulator shows the importance of keeping emotions in check. Despite the fact that you can’t lose real money in a stock market game app, the investor’s brain works almost as if he were investing real money. The emotions he will experience during the virtual game foreshadow what an investor can expect when investing in the real stock market.
Is it worth investing in the stock market?
It is not necessary to have a large pot of money to start investing in the stock market. A beginner may consider investing in the stock market as heavily complicated, but it is very easy to learn the rules of the market.
Many people at the beginning of the adventure with the stock market probably ask themselves – is it worth investing in the stock market? The stock market arouses very extreme emotions. In the short term it can bring large profits if the investor invests enough, but it can also be the cause of high losses. This depends on when the investor invests in certain securities and what shares of companies he selects for his investment portfolio.
An investor should know when to buy and when it is better to sell in order to achieve the highest possible profits. In the world of finance it is difficult to predict anything, which is worth keeping in mind. True, you can support yourself with information from companies, economic data, but you never know one hundred percent what will happen in the market.
So is it worth investing in the stock market? This depends on whether the investor is able to accept a higher investment risk. Some people compare investing in the stock market to gambling. This can only be the case if the investor makes decisions under the influence of emotions, without analyzing market data. In such a situation, he is unlikely to make money from it.
Why invest in the stock market?
The main motivation for investors is the prospect of making a lot of money, which is not possible with conservative investments. Why is it worth investing in the stock market? Definitely for the above-average profits, as well as for the adrenaline rush and to experience an exciting adventure. There are many reasons why investing in the stock market can be a good decision:
- the investor can choose at his discretion the shares of companies that are listed on the stock market,
- purchase of shares makes the investor a co-owner of a certain company and thus gains the right to dividends,
- the investor can invest on the stock market not only in stocks, but also futures contracts, bonds, or instruments based on currencies and raw materials,
- the investor makes his own decisions on which instruments to buy and which to sell,
- also has an influence on the overall investment, thus reducing risk, through the use of diversification.
Is it safe to invest in the stock market?
It is indeed possible to earn a lot of money on investing in the stock market. However, only those people who have already made money in this way know how much effort it requires. It seems to young people, especially beginners, that making money on the stock market is trivial. However, if it really was, there would be many millionaires in the world.
People who decide to invest in the stock market should have a financial surplus in their account. It is best to invest funds that represent savings, the loss of which will not cause a burden on the household budget. Otherwise, one can easily become discouraged from investing. However, it is necessary to take into account the risks of loss – setting yourself up for big money at the very beginning of the journey, you can be severely disappointed.
In particular, safe investment in the stock market is associated with the use of an appropriate strategy or a combination of several. Investing in the stock market can bring considerable profits in case the investor keeps his emotions in check, deepens his knowledge, and develops his own strategy. A little luck is also useful.
Are you just starting to invest and looking for safe, low-risk options? Investing in stock can seem intimidating, especially if you’re a beginner. Luckily, there are several stocks that can make good investments that won’t cause too much risk for inexperienced investors. Learn about the 7 safe investment stocks here!
Research Your Investment Options Before You Buy
Before investing in any stock, do your research. Understand the company’s financials and figure out how much of a risk you’re willing to take. There are many online resources available to help you evaluate potential investments. Additionally, consider talking with an investment advisor or financial planner if you need assistance determining which stocks may fit into your portfolio.
Focus on Companies With Established Track Records
Focus your investing on companies with established track records. Companies with a sound history of financial performance, strong balance sheets and environmentally-friendly operations are often less risky than start-ups or speculative stocks. Investing in well-known, established blue chip companies can provide a solid foundation for growth and help to diversify your portfolio.
Don’t Put All Your Eggs in One Basket
Investing in multiple stocks is a smart way to diversify your portfolio and reduce risk. Even if one company fails, your investments would not be completely wiped out. Putting all your eggs in one basket can be risky because you are relying on the performance of only one company. It’s a good idea to spread your investments across different sectors to mitigate unexpected losses from a single stock or sector.
Balance Risk Against Potential Returns When Investing
When selecting stocks, it’s important to consider both the potential risks and returns. Before investing in any company, take a look at their track record of success relative to similar firms, as well as their risk rating. Stocks with a high risk rating may offer higher potential rewards, but they could also present greater losses when the stock value drops. Similarly, stocks with low volatility tend to have less potential for gain but also carry lower risk levels. When looking for investments combine these two factors with other considerations like their dividend yield and future outlook in order to make informed decisions.
Diversify Your Portfolio of Stocks Across Different Sectors and Geographies
Diversifying your stock portfolio is key for minimizing risk without compromising potential returns. Choose a balance of stocks from several different industries, such as technology, manufacturing, retail and finance. Additionally, diversify geographically by including companies from different countries or regions if your budget allows. When done correctly, a well-diversified portfolio can help to offset individual stock fluctuations and could offer higher returns over the long run.