Investing in the stock market is a long process. Sometimes a very long process. I am talking about value investing not training. To become a better investor in the stock market you must know the philosophies and rules of investing in the stock market.
Here in this article, there are ten golden rules of investing in the stock market. These are the fundamental rules of investing, it can be applied anywhere in investing.
In investing only one thing that is most important is your capital. A stock market is a compounding machine. If your capital is lost, your earning capital is also lost. So it is very important to prevent your capital from losses.
10 Golden rules of investing
- Never lose your money
- Focus on long-term investing
- Invest, does not speculate
- Buy low and sell high
- Have a basic idea of accounting
- Control your emotions
- Understand the business before investing
- Put only surplus money in the stock market
- Diversify to minimize your losses
- Have patience
1. Never lose your money
In the stock market, your money is making money. If you do not have money, you will not make more money. The number one rule in the stock market is not to lose money on the first plane.
If the price of any stock is down by 50 percent, it would not recover by 50% bounce back of stock. To recover your money your stock has to go up by 100%. This is the number one golden rule of investing.
To protect your money from losses you have to be careful about your investments. Only invest in the business you understand. Invest in a stable business.
Warren Buffett’s 2 rules of investing.
Rule no.1: Never lose your money.
Rule no.2: Never forget rule no. 1.
2. Focus on long-term investing
The stock market is very volatile in the short run. If you want to make a sizable amount of money from the stock market then you have to focus on long-term investing. Long term does not mean 5 days, 10 days, or once a month. Long term investing means 5 years 10 years.
The Stock market is more predictable in the long run.
Warren Buffett says, in the short-run stock market is a voting machine and in the long run, it is a weighing machine.
Warren Buffet has made all his money by investing in the long term.
Warren Buffett says that if you can’t buy a stock for one year don’t buy it for 10 minutes.
3. Invest, does not speculate
Investing and trading are two different approaches to make money in the stock market. Investing is a more fundamental approach towards the stock market and trading is a more technical approach towards the stock market.
In investing, one makes money by holding stocks for the long term. Investors think of themselves as the owner of the business. They think they are buying a piece of business.
In training, traders make money by holding the stock for a very short period of time. They make money in the price fluctuation of the stocks. Trading in the stock market is like gambling. You bet on the stock by knowing nothing about the stocks.
All the great investors in the world have made their money by investing in the stock market. They always recommend investing in everyone.
Warren Buffett says that: you can trade doesn’t mean you should trade.
4. Buy low and sell high
We all know that we have to buy low and sell high to make profits from the stock market.
But what’s the catch! Why are you telling me this?
We all know that we should buy low and sell high, but determining what is low and what is high is more important.
Finding the lows and highs of any stock is a really difficult task. Buying at the right price and selling at the right price is all that is important.
In buying and selling of stocks, the emotional factor comes into play. We tend to buy the stock at a higher price because we fear that we are going to miss the opportunity.
And we sell just after a stock drop in value because we think that we have made a mistake and this stock will go to zero.
5. Have a basic idea of accounting
“Accounting is the language of the business.”- Warren Buffett
To understand the economics of the business you have to know the accounts. Accounting is reading the numbers in the business. To read the financial statements of the business, you need accounting.
You do not need to be an accountant to understand accounts. In investing you only need the basics of accounting. As an investor, your job is to interpret the financial statements.
Financial statements of any company consist of three elements
- Profit and loss statements
- Balance sheet
- Cash flow statements
If you want to learn the basics of accounting to interpret the financial statements of any business you can read these books. These books are easy to read and also these books will teach you how Warren Buffet interprets the financial statements and how he uses these numbers to make their financial decisions.
Warren Buffett Accounting Book: Reading Financial Statements for Value Investing
Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage
6. Control your emotions
In the stock market, you don’t have to beat someone in their game, in the stock market you have to control your own emotions.
In the stock market it is very important you make rational decisions, not emotional decisions. Do not make decisions based on your emotions. Take an informed decision of buying and selling stocks.
To make an informed decision you have to know the economics of the business. Most people get emotional due to price fluctuation on the market. They tend to buy high and sell low.
7. Understand the business before investing
Good investors are those who find good businesses to invest in. To find good business you have to first understand the business.
Here understanding means to know what does the business does, how they make money, what are their products and services. How they manage to increase profits.
Before investing in any company do adequate research about the company. The more you know about the company, the better you make decisions.
8. Put only surplus money in the stock market
Investments in the stock market are very riskier due to volatility in the stock market. You will see ups and downs in your portfolio. The stock market never goes into the stock market. So you will never accept your portfolio to go up.
It is a place of uncertainty. You will never predict the mood of the stock market. It is more predictive in the long run.
The money you need in the near future must never put into the stock market. It is not the palace to make quick money. More quickly you will make money, the more quickly you will lose. So take proper care of your finances before putting your money into the stock market.
9. Diversify to minimize your losses
Diversification is a process to spread your portfolio into different places to minimize your losses and risk on investment.
There is a saying that” Never put all your eggs in one basket.”
To diversify your portfolio you have to divide it into different places such as equity, bond, mutual fund, fixed deposit, etc.
When your money is in different places then you do not have to worry much about your investment.
10. Have patience
Warren Buffett says that in the stock market money goes from inpatient to the patient.
Patience is the key ingredient for investing in the stock market. If you try to make money in the short run, you will ultimately lose your money.
The stock market is very volatile, if you do keep patience to hold stocks when it is down by 20% then you will not make money in the stock market.
Investing in the stock market is an art. To become a better investor you have to learn the golden rules of investing. One thing that will help you more in the stock market is reading books. Read more books on investing. Here is the list of best investment books.
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