How easy is it to make money on the stock market?
Trading on the stock market may seem confusing for a beginner, but it’s proven to be one of the most consistent ways to make a profit. In this era of low interest rates, more and more people are considering whether they could benefit from stock market trading. However, in order to do this successfully it’s vital you understand the market and invest your money wisely. While stock trading can prove very lucrative, no profit can ever be guaranteed and you should only invest money you can afford to lose.
Professional hedge fund investors only get it right around 60-65% of the time, but these individuals put in 100 hour work weeks and eat, breathe and sleep the financial markets. It isn’t easy to make money on the stock market, but it is possible. If you want to earn big like the professionals, you need to understand the rules and follow their lead. These tips will help you familiarise yourself with some of the strategies used by successful stock brokers.
- Stable long term investments are the safest to protect your capital
It may come as a shock but buying and selling isn’t the best way to make money on the stock exchange. Instead investing in shares that offer interest and dividends will usually give you a higher return in the long run. Be sure to invest in a company with a record of steady and consistent increases in the share price, then just sit back and relax.
Ideally you should be prepared for at least a 5 year term of investment. During this time the shares will fluctuate on a daily and weekly basis, but if you invest wisely by the end of the term you’ll receive a substantial increase above basic inflation.
- Identify your perception of risk
Each of us has a specific risk tolerance. This means one person might be willing to risk £100 for a return of £200, but another may only be willing to risk £100 for the chance of a £1000 return. There is no right answer to how much you should risk, but acknowledging your limits before you go into stock market trading will help you limit any losses to an acceptable level.
- Diversify your investments
Choosing to spread your risk by investing across a variety of platforms is a prudent move to diversify your exposure. This allows you to recover from losses more easily, as if one of your stocks dips the others should be unaffected. The best way to diversify investment is by targeting companies from a variety of industries, so for example when the gold price dips your investments in the oil industry will be unaffected. Similarly, investing in companies of different nationalities will spread your risk further, making your portfolio more durable and responsive to market forces.
It’s worth being aware that not all successful hedge funds use this principle. Instead world famous investors like Warren Buffett actively avoid stock diversification. Buffett’s explanation for this is confidence in the ability of his company to accurately research and assess an investment’s risk. With over £71 billion in wealth his approach appears to be working, but with so many analysts and CEO’s at his beck and call he has a considerable advantage over the average investor.
- Make objective and logical decisions
If you can’t put your emotions aside and make objective decisions, then stock market trading is not for you. Successful traders are able to weigh up the risks and benefits of every investment to assess the odds of making a profit.
Whenever you buy a stock you should have an exit strategy and set a threshold at which to liquidate the investment. Holding onto a sinking stock because you can’t bear to lose money is a sure fire way to lose everything. Thankfully on some spread betting platforms such as CMC Markets you can set up a stop-loss order when you purchase, so your investment will be cashed out if stocks fall to a specified level. This practice can give you ease of mind if you can’t access the markets while at work or on holiday.