Investing in the stock market can be exciting, but it can also be intimidating. Jumping into the market opens up individuals to a wealth of new vocabulary, concepts, and information that can take time to understand. But those who learn to navigate these hurdles can be rewarded with short- and long-term financial growth.
There is far more to investing than merely picking a stock and hoping it increases in value. Successful investing requires sound stock investment strategies that lead to making the right choices more often than the wrong ones.
While an individual’s investment strategies should depend on several factors, including how much money they have to invest and at what age they begin investing, there are general investing tips that practically any person or organization should follow.
#1: Stocks Usually Offer the Best Returns on Long-Term Investment
Stock values can skyrocket or plummet within minutes. That volatility can make them seem like a bad investment option. When investors look at the stock market’s history, they might balk when they see that values fell by 24.4% on December 12, 1914 — the first day stock trading resumed after the outbreak of World War I. Stocks also lost 37% of their value in 2008.
Those short-term pitfalls might look bad, but the stock market still offers positive, if not the best returns on long-term investments. Historically, stock value has risen by nearly 10%, where 10-year U.S. Treasury bonds have only risen 5%, and three-month Treasury bills have only jumped by 3.5%. Because of this, anyone focused on the long term would do well to consider placing a good amount of their money in stocks.
#2: Stock Diversification Reduces Specific Risk
Modern portfolio theory states that investors should diversify investments to reduce risk. By purchasing a wider range of stocks, investors lower the risk of purchasing stock in one company. These stocks can come in many different types, including growth stocks; value stocks; and large-, mid-, and small-company stocks.
Investors can choose to spend money on stocks that have relatively high risk. They should do so knowing those stocks often offer the largest returns, assuming, of course, that the stocks don’t fail. The potential failure makes those companies risky.
Less risky stocks rarely have the wealth potential of high-risk stocks. However, they usually offer a more balanced return on investment that counters the potential losses that may come with higher-risk stocks. This type of diversification gives investors the opportunity to earn solid returns without worrying that a single investment will ruin their portfolios.
#3: Diversification Cannot Reduce Systematic Risk
While a diverse portfolio reduces the specific risk of purchasing a stock, it does not affect systematic risk. In fact, investors purchasing stocks have no way to control systematic risk.
System risk means that investors must take into account that an entire market can gain or lose value. The value of a specific stock matters very little when the whole market falls. That’s why investors cannot adequately protect themselves from the negative effects of economic recessions and depressions.
If one looks at investing as a type of bet, systematic risk assumes the possibility that all bets will lose. This essentially creates a no-win situation, where every investor loses money because the overall economy loses value.
#4: Behavioral Finance Theory Addresses Inconsistencies
Traditional investment theory says that all investors act rationally to invest their wealth. This does not explain why stock and market values often perform erratically. Behavioral Finance Theory accounts for this by explaining the emotional aspect of investing.
Investors do not always behave rationally, because they respond to emotions such as fear and optimism. Market volatility, therefore, does not always stem from objective factors. Instead, it comes from a variety of factors. These may include the impact of real market dynamics, plus how people perceive and react to news about the economy, politics, and company performance.
These and other influences can lead to investors making poor decisions, such as holding a losing position on a stock instead of dealing with the negative emotions that could correlate with taking a loss. Therefore, it’s important for investors to train themselves to be mindful of their behaviors and emotions when trading, which can help minimize the chances of decreasing their investment returns.
Develop Skills in Finance and Investing
Organizational and individual investing involves complex factors that are often difficult to explain until after events have happened. The more you know about investment history, theory, and planning, the better equipped you will be to help other people invest wisely.
Ohio University’s Online Master of Business Administration (MBA) degree can prepare individuals to gain a historical perspective of the stock market, and understand the dynamics that move modern investing.
The curriculum is designed to help students gain financial knowledge to pursue a variety of careers in business or finance. Discover how Ohio University’s MBA program can help you succeed in a financial-related career and as an investor.