short-term stock investing is only for a limited set of people. While the gains can be substantial, the losses can be even more phenomenal. Investing in the long term in fundamentally strong companies is the best and the safest way to earn money from the stock market.
Stay away from penny stocks
Staying away from bargain stocks ensures that your earnings are not lost in hopes of a high-percentage gain. One of the big mistakes retail investors make is to pick stocks depending on their price rather than the company business plan and fundamentals. Returns on any investment in the stock market are related to the fundamental growth of the company. A large number of bargain stocks are sluggish and have virtually no upside trend due to lack of strong market fundamentals. One has a higher chance of making money by investing in the stock of one fundamentally strong company (like a mid-cap or a large-cap) than by investing in several penny stocks of a small-cap company.
Diversify your portfolio
Even if you are a long-term investor, you must have a diversified portfolio. Investing in multiple sectors and various companies of different sizes across the board makes sure that one can fight the sluggishness in one sector.
Average out losses
Learning to limit losses is one of the best ways to avoid bleeding in the stock market. A large number of investors sell for marginal profits, but hold on to their stocks even with the stock going way beyond the purchase price. The best way to make money in such a scenario is to first limit losses by buying on dips or buying when the stock is falling to bring down the average purchase price. Buy low, sell high is the fundamental rule of the game. Trying to limit the losses and maximising the gains is the art that only a long-term investor can master.
The writer is CEO, BankBazaar.com