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Article Contributed by Hari Wibowo
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Invest Not Gamble
It is easier said than done. You want to invest your money, not
to gamble it away. A lot of people unknowingly has become
gamblers instead of investors. The distinction between the two
is not what they do, but rather how they do it. How can you
differentiate the two? Here are the basic distinction between
the two.
Gamblers. I am not referring to individuals who went to
the casino and gamble. I was referring to stock gamblers,
individuals who blindly throw their money away in investing.
They love buying stocks. The ups and downs of the stock price
thrills them. Whether they make a profit or loss, they have no
idea what causes it.
Investors. These are not individuals who merely buy
stocks. They know what they bought, researched it beforehand and
are aware of the risks involved. They may lose money on an
investment but they knew why they lose and they learnt from
their loss to improve future performance. They do not over
diversify and yet they manage to spread their risk apart.
So, how do we all learn to be investors, specifically stock
investors? First, we need to educate ourselves and know how to
calculate the fair value of a common stock. If a stock is
currently undervalued, we need to assess whether we can accept
the potential return given by the stock. If the stock is 20%
undervalued, would you want to accept that kind of return? If
so, then you might buy the stock as an investment.
Aside from the potential return, investors also need to assess
the potential risk associated with the purchase. What would make
the stock to drop from your purchase price? The most likely
occurrence is that a particular stock fails to generate a profit
expected by your calculation. If your calculation shows a fair
value of $ 50, while the actual profit generated warrants a fair
value of $ 30, then you might experience a loss. This of course
depends on what price you buy the stock for. Anyway, if you know
the risk and reward of a stock purchase, then you can decide
whether this stock is right for you.
Another tools needed to be stock investor is portfolio
management. You do not want to over diversify but you also do
not want to expose yourself to incredible risks associated with
the adverse movement of your holdings. In general, you can do
this by buying stocks of different industry or buying companies
which engage in different kind of industries. Of course, the
stocks you bought should fulfill your criteria as an undervalued
investment.
Finally, you should keep abreast of new development. Investing
is about identifying the best alternatives for your money. Right
now, stock might be the best investment for the skills that we
have. In the future, perhaps bond investing will be the best
alternative to grow your investment. In whatever things that you
do, please get familiar with a particular investing vehicle
before committing your hard-earned money into it. This is what
separates investors from gamblers.
About the author:
Don't gamble your money away. Learn how to invest at
http://www.noviceinvesting.com
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