Investing in stocks, bonds, mutual funds, and other financial instruments is not akin to spinning the roulette wheel in Las Vegas. People who are stuck in the mind frame that investing is the same as gambling with their money do themselves and their financial futures a disservice.
The difference between investing and gambling is research. Investors must conduct due diligence in order to mitigate the risks of investing their money.
Before you invest in any stock or mutual fund, investigate the company by…
Understand the Company. You should try and know the company inside and out before you purchase shares in them. What do they make? Who do they sell to? Does their competition do it better and why? Why do you think that this company is going to increase its revenue, profits, and or stock price? The same questions hold true for mutual funds as well. What is their investing style and what are they trying to accomplish? Are they sticking to their investing strategies during these current rocking financial times?
Read as Much as Possible. Read all of the latest news articles about the firm that you are researching. Look at their stock chart. Was there a particular day that the stock price took a nose dive? What happened on that day? Look for a news article on that day to help explain any drastic changes in share price. Google Finance is the best for this with their graphs that have corresponding letters where top news stories have taken place (see graph below). You should also be reading all the financial reports that the company is required to produce and file with the Securities and Exchange Commission (SEC). You can find them on the Edgar Database.
Listen to a Conference Call. Every quarter most public companies hold conference calls for their institutional investors such as pension funds, mutual funds, and their analysts that follow the stock. These calls are simulcast over the internet, and you can even listen to past calls stored on financial websites like Yahoo Finance. These calls provide an incredible wealth of knowledge and a behind the scenes look at how company executives view the company.
Warren Buffet, the most famous investor in the world, does not invest in anything that he does not understand. He did not have very many technology companies in his portfolio when the tech bubble burst in 2000 because he did not understand how companies like Amazon could command such a high stock price even tough they had never produced a profit. This is a great piece of advice that you should keep in mind. Do not invest in any company, product, or mutual fund that you do not understand. Investing is not a gamble when you do your research and mitigate your risks. Of course there are always risks of losing your money in the stock market which has become vividly apparent in today’s economy, but carefully choosing your investments can help you pick winning stocks and mutual funds that will grow over the long term.
Blog Carnivals from the past few weeks:
1. Carnival of Personal Finance #174
2. Carnival of Money Stories #80
3. Finance Fiesta Carnival
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