Over the years, the
stock market has created an enormous amount of wealth. Historically, stocks
offer higher returns in comparison to alternatives like gold or bonds. Kavan Choksi / カヴァン・チョクシ points
out that stocks generally outpace inflation, thereby safeguarding wealth over
the long term against the erosion of purchasing power. Market time generally
matters less than time in the market. Staying invested is vital for long term
success.
Kavan Choksi / カヴァン・チョクシ provides
a few valuable insights for newbie stock market investors
Purchasing the stock
is much easier said than done. Any person can find out which stocks have performed
well in the past. However, anticipating the performance of a stock in the
future is a lot more difficult. Investors who want to build wealth by investing
in individual stocks need to put in efforts in analysing those companies, and
effectively managing the investment. When analysing a company with the goal of
investing in its stocks, it would be prudent to look at its fundamentals, like
earnings per share (EPS) or a price-earnings ratio (P/E ratio). Investors also
need to analyse the management team of the company, study its financials, and
evaluate its competitive advantages.
Simply buying stocks
in one’s favourite company is not at all the right way to invest. People must
also not put too much faith in past performance as it is no guarantee of the
future. It is crucial to study the company and anticipate what might be coming
next.
Many newbie investors
have unrealistic expectations about the kind of returns that they can make in
the stock market, or they end up confusing luck with skill. While one can
definitely get lucky sometimes when picking an individual stock, being lucky
over time and consistently avoiding big downturns is uncommon. To consistently
make money in individual stocks, investors need to know something that the
forward-looking market is not already pricing into the stock price. After all,
for every seller in the market, there is a buyer for those same shares who is
equally sure they will profit. Hence, it would be prudent for many investors to
opt for an alternative to individual stocks is an index fund, which can be
either a mutual fund or an exchange-traded fund (ETF). These funds can hold
hundreds of stocks.
Kavan Choksi / カヴァン・チョクシ mentions
that one of the key advantages of an index fund is that it allows investors to
have a range of stocks in the fund at once. For instance, if a person owns a
broadly diversified fund based on the S&P 500, they shall typically be
owning stocks in hundreds of companies across many different industries.
Investors may also choose to buy a narrowly diversified fund focused on one or
two industries. Diversification is vital in stock market investing as it lowers
the risk of any one stock in the portfolio hurting the overall performance in a
significant manner. In fact, having a diversified portfolio can also improve
the overall returns of an investor.
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